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The effect of oil price on industrial production and on stock returns

Ramon Cobo-Reyes and Gabriel Perez Quiros

No 05/18, ThE Papers from Department of Economic Theory and Economic History of the University of Granada.

Abstract: This paper analyzes the relationship between oil price shocks and the industrial production and between oil price shocks and the stock returns. The objective is to study which relationship is stronger or which variables reacts more rapidly to changes in oil price. We develop a Markov switching model assuming that there exits a latent variable (the state of the economy) which determines the mean of industrial production and the volatility of stock returns. The results show that raises in oil price affects in a negative and statistically significant way to stock returns and to industrial production, but the effect on stock returns is stronger than on industrial production.

Keywords: oil price; Markov switching models. (search for similar items in EconPapers)
JEL-codes: E32 E37 C32 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2005-09-05
New Economics Papers: this item is included in nep-bec, nep-ene, nep-fin, nep-mac and nep-rmg
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