The lead of oil price rises on US equity market beliefs and preferences

Jonathan Dark

Journal of Futures Markets, 2021, vol. 41, issue 11, 1861-1887

Abstract: We find that oil price rises from a strengthening global economy have a state‐dependent lead on US equity market beliefs and preferences. When equity volatility is low, rising oil prices lead higher cashflow expectations, lower long‐run (LR) volatility, and increased LR risk aversion. When volatility is high, markets focus on the contractionary effects of higher input costs, with rising oil prices leading decreased cashflow expectations, higher LR volatility, and decreased LR risk aversion. Findings suggest important refinements for asset pricing, portfolio choice, and models that link financial markets to the macroeconomy.

Date: 2021
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