Oil price shocks and stock market anomalies

Zhaobo Zhu, Licheng Sun, Jun Tu and Qiang Ji

Financial Management, 2022, vol. 51, issue 2, 573-612

Abstract: This paper provides a novel perspective to the nexus of oil prices and stock markets by examining the impact of oil price shocks on stock market anomalies. After decomposing oil price shocks into three types , we find that aggregate demand shocks have the strongest influence on stock market anomalies. In contrast, oil supply shocks and oil‐specific demand shocks have little impact. Similar results are also found in the industry analysis. Interestingly, the link between aggregate demand shocks and anomalies is the strongest among firms with either small size or high idiosyncratic risks. The documented effects are robust after controlling for investor sentiment as well as several well‐known macroeconomic or market factors. Our findings are consistent with but also extend the sentiment‐based explanation in that we show that uncertainty also plays a role in explaining stock market anomalies.

Date: 2022
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