Once more... a story about oil and stock markets

Abstract

In this study we take a fresh look on the relationship between oil and stock markets. Using a rolling SVAR model, we examine this relationship in a time-varying framework, which, to the best of our knowledge, has not been attempted before in the literature. Following a historical decomposition and an impulse response analysis, we examine this relationship on 15 net oil-importing and oil-exporting countries as well as on 49 US industries, using the largest dataset available, ranging from 1973:1 to 2016:12. The results indicate that the oil prices respond to a multitude of different structural shocks that vary over time. Another interesting finding is that there is significant time variation on the responses of the stock market returns to the different oil price shocks, while we also find that the responses of each country’s share prices highly depend both on the underlying cause of the oil price change and on the net position of the country in the oil market. Finally, examining the role of economic policy uncertainty on this relationship, we find evidence that it plays an important role in the transmission of the oil price shocks to the stock market.