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Oil shocks, policy uncertainty and stock market return

Wensheng Kang and Ronald Ratti

MPRA Paper from University Library of Munich, Germany

Abstract: Oil price shocks and economic policy uncertainty are interrelated and influence stock market return. For the U.S. an unanticipated increase in policy uncertainty has a significant negative effect on real stock returns. A positive oil-market specific demand shock (indicating greater concern about future oil supplies) significantly raises economic policy uncertainty and reduces real stock returns. The direct effects of oil shocks on real stock returns are amplified by endogenous policy uncertainty responses. Economic policy uncertainty and oil-market specific demand shock account for 19% and 12% of the long-run variability in real stock returns, respectively. As a robustness check, (domestic) economic policy uncertainty is shown to also significantly influence real stock returns in Europe and in energy-exporting Canada.

Keywords: Oil shocks; economic policy uncertainty; stock returns; structural VAR (search for similar items in EconPapers)
JEL-codes: E44 E60 Q41 Q43 (search for similar items in EconPapers)
Date: 2013-02-05
New Economics Papers: this item is included in nep-ene, nep-mac and nep-spo
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Citations: View citations in EconPapers (269)

Published in Journal of International Financial Markets, Institutions & Money 26 (2013): pp. 305-318

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