Oil price shocks and stock market returns

This paper presents a survey on recently published studies on relationship between oil price and stock market. The study covers several studies on the effects of oil price on China, India, Lebanon, United States and some other G7 stock markets.
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Oil price shocks and stock market returns Accounting 2 (2016) 103–108 Contents lists available at GrowingScience Accounting homepage: www.GrowingScience.com/ac/ac.htmlOil price shocks and stock market returnsMaryam Orouji*Masters in Physics, Nikan high School, Community Education Council District 2, Tehran, IranCHRONICLE ABSTRACT Article history: During the past few months, there has been a steady downside trend on oil price. From summer, Received December 5, 2015 2015 to winter, 2016, the oil price has declined to the $20 range. Its rate of decline is amazing, Received in revised format having lost $10, one third of its value, in just one month. This paper presents a survey on February 16 2016 recently published studies on relationship between oil price and stock market. The study covers Accepted February 26 2016 Available online several studies on the effects of oil price on China, India, Lebanon, United States and some February 26 2016 other G7 stock markets. We also review the effects of oil price volatility on stock market. The Keywords: results of most studies have indicated some strong relationships between oil price volatility and Oil price stock market return. Volatility Stock market © 2016 Growing Science Ltd. All rights reserved.1. IntroductionDuring the past few months, there has been a steady downside trend on oil price. From summer, 2015to winter, 2016, the oil price has declined to the $20 range. Its rate of decline is amazing, having lost$10, one third of its value, in just one month. Despite the fact that the price of a barrel of crude oil hasnot hit its all-time low, adjusted for inflation, of $12.45 from December 1998, it is very likely to getthere in less than a month if the same decline trend continues. The $20 price of a barrel of crude oil isunanimously considered cheap; to put things in perspective crude oil has become inexpensive than theproverbial steel barrel or even mineral water. The $20 range is also a game changer for manyperspectives of human life. Undeniably, oil prices maintain a proclivity for uncertainty. The decline onoil price has also influenced on stock market since most major stock market seem to have directrelationships with oil price (See Fig. 1). There are also several studies on relationship between oil priceand stock market return and this paper presents a brief review on recent studies between these twoitems.* Corresponding author.E-mail address: oroujim@gmail.com (M. Orouji)© 2016 Growing Science Ltd. All rights reserved.doi: 10.5267/j.ac.2016.2.005104 2. Oil price and market returnAngelidis et al. (2015) studied the capability of oil price returns, oil price shocks and oil price volatilityto shed light on the state of the US stock market returns and volatility. The disaggregation of oil priceshocks based on their origin helped to find out whether they had incremental forecasting powercompared with oil price returns. They reported that oil price returns and volatility could help forecastthe state of the US stock market returns and volatility. Nevertheless, the full impacts of oil price returnscould only be disclosed when the oil price shocks were disentangled and as such they claimed that theoil price shocks had an incremental power in predicting the state of the stock market. Fig. 1. Trend of oil priceDiaz et al. (2016) investigated the relationship between oil price volatility and stock returns in the G7economies based on the monthly information over the period 1970-2014. They considered alternativespecifications for oil prices in order to measure oil volatility. They predicted a vector autoregressivemodel by considering interest rates, economic activity, stock returns and oil price volatility by keepingin mind the structural break in the year 1986. They reported a negative response of G7 stock marketsto an increase in oil price volatility. They also reported that world oil price volatility was generallymore substantial for stock markets than the national oil price volatility was.Reboredo and ...