Oil Prices and the Stock Market

Ready, Robert

doi:10.2139/ssrn.2140034

Cited by 37 publications

(133 citation statements)

References 14 publications

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“…In that sense, the paper is best viewed as a thorough attempt to study how oil risks are linked to oil and nonoil securities rather than as a prespecified factor model like that of Chen, Roll, and Ross (). Our approach and findings complement recent work that explicitly models the role of oil in the pricing of securities (see Baker and Routledge () and Ready (, )).…”

supporting

confidence: 58%

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Estimating Oil Risk Factors Using Information from Equity and Derivatives Markets

Chiang¹,

Hughen²,

Sagi

2015

The Journal of Finance

106

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We introduce a novel approach to estimating latent oil risk factors and establish their significance in pricing nonoil securities. Our model, which features four factors with simple economic interpretations, is estimated using both derivative prices and oil-related equity returns. The fit is excellent in and out of sample. The extracted oil factors carry significant risk premia, and are significantly related to macroeconomic variables as well as portfolio returns sorted on characteristics and industry. The average nonoil portfolio exhibits a sensitivity to the oil factors amounting to a sixth (in magnitude) of that of the oil industry itself.FEW, IF ANY, COMMODITIES have been the focus of more attention for their perceived economic significance than oil. While there is strong evidence relating oil prices to the business cycle, the nature of the relationship is nonlinear, timevarying, and difficult to attribute to any single source such as political uncertainty, cartel decisions, or global economic conditions (see Hamilton (2003) and Barsky and Kilian (2004)). Despite its prominence in the business media and economics literature, and despite the well-documented role of business cycles in asset pricing, academic research has largely failed to find consistent evidence that oil is an important determinant of cross-sectional asset prices.1 This paper introduces a new model and method to estimate latent oil risk factors using

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supporting

confidence: 58%

“…Our decomposition better resembles the supply interpretation in Ready (), where long‐run, short‐run, and volatility fluctuations in supply can be priced differently in equilibrium. Ready () provides evidence complementary to ours for the importance of oil supply shocks in the cross‐section of returns.…”

supporting

confidence: 55%

Estimating Oil Risk Factors Using Information from Equity and Derivatives Markets

Chiang¹,

Hughen²,

Sagi

2015

The Journal of Finance

106

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“…(1,1) (ARMA(1,1)) model (see Ready, 2018). The return on an index of oil producing firms is captured using the World Integrated Oil and Gas Producer Index from the Datastream database.…”

Section: Methodsmentioning

confidence: 99%

Oil prices and the U.S. economy: Evidence from the stock market

Thorbecke

2019

Journal of Macroeconomics

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Using three identification strategies, this paper finds that supply-driven oil price increases lowered U.S. stock returns in many sectors before the shale oil revolution but not after. It also reports that oil prices are a priced factor in a multi-factor asset pricing model both before and after the shale revolution. While oil prices mattered in both periods, the beneficial effects of oil price increases on the U.S. stock market have risen and the harmful effects have fallen since U.S. oil production soared after 2010.

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“…also provide evidence that the effects of oil price shocks are industry-specific. In particular, they show that the Automobile & Trucks and Retail industries only respond (negatively) to precautionary demand shocks, whereas Petroleum & Natural Gas and Precious Metals only respond (positively) to aggregate demand shocks.SinceKilian and Park (2009), an increasing number of studies have examined the effects of the different oil price shocks on stock market returns and volatility (see, inter alia,Ready, 2017;Kang et al, 2017;Angelidis et al, 2015;Kang et al 2015a;Fang and You, 2014;Gupta and Modise, 2013;Antonakakis et al, 2013;Abhyankar et al, 2013;Degiannakis et al, 2014;Kang and Ratti, 2013;Baumeister and Peersman, 2013;Basher et al, 2012).…”

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confidence: 99%

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

Degiannakis¹,

Filis²,

Arora³

2018

The Energy Journal

215

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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.

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Oil Prices and the Stock Market

Cited by 37 publications

References 14 publications

Estimating Oil Risk Factors Using Information from Equity and Derivatives Markets

Estimating Oil Risk Factors Using Information from Equity and Derivatives Markets

Oil prices and the U.S. economy: Evidence from the stock market

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

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