Which oil shocks really matter in equity markets?

Adam Clements, Cody Shield and Stephen Thiele

Energy Economics, 2019, vol. 81, issue C, 134-141

Abstract: This paper examines the relationship between structural oil shocks and US equity markets. The recent oil shock decomposition of Ready (2018) is reconsidered and refined, providing a clearer delineation between shocks to equity market discount rates and aggregate demand, leading to an oil shock specification which attributes substantially more explanatory power to the latter in explaining equity market variation. Providing links with the literature dating back to Kilian and Park (2009), an explicit role is given to precautionary demand shocks using an independent measure constructed from oil futures data, reducing the role of the supply shocks obtained as the final residual in the recursive identification scheme. In an extended sample that allows an analysis of the oil/equity market relationship since the global financial crisis, the modified aggregate demand shocks have approximately twice as much explanatory power for stock return variation than the demand shocks of Ready (2018). The importance of these shocks in driving oil price changes and equity market volatility has only increased since the financial crisis, with the role of supply shocks diminishing. Once these demand effects are accounted for, there is little relationship between precautionary demand shocks and equity returns, in contrast to the existing literature.

Keywords: Supply and demand shocks; Stock markets; Precautionary demand; Volatility (search for similar items in EconPapers)
JEL-codes: G10 G15 Q41 Q43 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (26)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0140988319301057
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:81:y:2019:i:c:p:134-141

DOI: 10.1016/j.eneco.2019.03.026

Access Statistics for this article

Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant

More articles in Energy Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().