The Impact of Oil Price Shocks on the U.S. Stock Market

Lutz Kilian and Cheolbeom Park

No 6166, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: While there is a strong presumption in the financial press that oil prices drive the stock market, the empirical evidence on the impact of oil price shocks on stock prices has been mixed. This paper shows that the response of aggregate stock returns may differ greatly depending on whether the increase in the price of crude oil is driven by demand or supply shocks in the crude oil market. The conventional wisdom that higher oil prices necessarily cause lower returns is shown to apply only to oil-market specific demand shocks such as increases in the precautionary demand for crude oil that reflect fears about the availability of future oil supplies. In contrast, positive shocks to the global aggregate demand for industrial commodities are shown to cause both higher real oil prices and higher stock prices. Shocks to the global production of crude oil, while not trivial, are far less important for understanding changes in stock prices than shocks to global aggregate demand and shocks to the precautionary demand for oil. Further insights can be gained from the responses of industry-specific stock returns to demand and supply shocks in the crude oil market. We identify the sectors most sensitive to these shocks and study the opportunities for adjusting one?s portfolio in response to oil market disturbances.

Keywords: Demand shocks; Oil prices; Stock returns; Supply shocks (search for similar items in EconPapers)
JEL-codes: G12 Q43 (search for similar items in EconPapers)
Date: 2007-03
New Economics Papers: this item is included in nep-ene, nep-fmk and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (66)

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Related works:
Journal Article: THE IMPACT OF OIL PRICE SHOCKS ON THE U.S. STOCK MARKET (2009)
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