Equity And Oil Markets Under External Shocks

The chapter investigates two hypotheses: first, that the impact of the Persian Gulf Crisis was stronger on the oil market than in the equity market; and, second, that there was an increase in the causal relationship between stock and oil prices during the crisis. Event-study and Granger causality tests confirm both hypotheses. The acceptance of the first hypothesis is consistent with the nature of the conflict which primarily affected the oil market due to the embargo of Iraqi oil. Also, the high degree of diversification of the S&P 500 index lessened the impact of higher oil prices. The confirmation of the second hypothesis agrees with efficient markets in the sense that equity and oil markets reacted quickly and simultaneously to the event.