Oil Prices and Stock Markets: A Review of the Theory and Empirical Evidence

Abstract

Do oil prices and stock markets move in tandem or in opposite directions? The complex and time varying relationship between oil prices and stock markets has caught the attention of the financial press, investors, policymakers, researchers, and the general public in recent years. In light of such attention, this paper reviews research on the oil price and stock market relationship. The majority of papers we survey study the impacts of oil markets on stock markets, whereas, little research in the reverse direction exists. Our review finds that the causal effects between oil and stock markets depend heavily on whether research is performed using aggregate stock market indices, sectorial indices, or firm-level data and whether stock markets operate in net oil-importing or net oil-exporting countries. Additionally, conclusions vary depending on whether studies use symmetric or asymmetric changes in the price of oil, or whether they focus on unexpected changes in oil prices. Finally, we find that most studies show oil price volatility transmits to stock market volatility, and that including measures of stock market performance improves forecasts of oil prices and oil price volatility. Several important avenues for further research are identified.

Oil price uncertainty and movements in the US government bond risk premia

“…The lack of studies analysing the impact of oil price movements on the US bond market is quite puzzling, given the well-established importance US Treasury securities as a global safe haven (Kopyl and Lee, 2016;Habib and Stracca, 2017;Hager, 2017), and also the fact that the bond market in 2018 was valued at more than $40 trillion US dollars, which in turn was $10 trillion US dollars more than the corresponding capitalization of the stock market (Bloomberg). While the existing international literature on the price, returns, and volatility relationship between oil and equity markets is huge to say the least (see for example, Degiannakis et al, (2018), and Smyth and Narayan (2018) for detailed reviews in this regard), in comparison, the number of studies examining the causal linkage between the bond and oil markets, is negligible.…”

Strategic Interactions and Price Dynamics in the Global Oil Market

“…Another question is the relation between oil prices and stock markets. For an extensive and interesting survey on this topic, seeDegiannakis, Filis, and Arora (2018) ECB Working Paper Series No 2368 / January 2020…”

Carbon Tax Saliency: The Case of B.C. Diesel Demand

“…American jurisdiction to introduce a significant and broad-based tax on carbon emissions from fossil fuel consumption. 12 The unique experience of B.C. carbon tax is now part of a policy forum in North America 13 and it has received the support of the Editorial Board (2016) of The New York Times to address GHG emission.…”

“…A very interesting feature of the new carbon tax was 11 Green(2007). 12 Since 2007, the province of Quebec requires that fossil fuel distributors pay a tax of $3/tonne of CO2, i.e. 0.7 cents/litre of gasoline.…”

“…There is a large literature on the asymmetric response of oil demand to positive and negative price changes. SeeDegiannakis et al (2017).23 The federal and provincial government each collect their own excise tax. The sum of the two taxes was 19.5c/litre in January 2008; 3.0c were added on January 2010 and 2.0c on April 2012.…”