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17-08-2022

Stock and oil price returns in international markets: Identifying short and long-run effects

Authors: Theophilus Teye Osah, Andre Varella Mollick

Published in: Journal of Economics and Finance

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Abstract

This paper examines how stock returns respond to oil prices with monthly data from 1990 to 2020 for 12 major economies: 6 oil-exporting countries and 6 oil-importing countries. Combining short and long-run empirical approaches in country-by-country analyses, we first document varying effects of oil price returns in the short-term, while increases in volatility (changes in VIX or geopolitical risk) have negative effects on stock markets. Dynamic OLS (DOLS) estimators show in the long-run positive oil price effects on stock markets for oil-exporters and relatively weaker negative evidence for oil-importers. Interest rate increases have strong negative effects in the long run. Panel analyses shed further light on these results along with structural breaks. Our findings suggest complementary insights from the DOLS long-run approach: oil prices and bond yields have expected signs and volatility has mixed effects on stock markets.
Appendix
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Footnotes
1
Brazil in the second half of the 2000s had several new oil field discoveries as discussed by Rodrigues and Sauer (2015) on the economic gains of pre-salt oil fields.
 
2
We use a maximum of 6 lags and check the statistical significance of the last lag at 5%. If the last lag is not statistically significant, we reduce it by one and reassess, until the specification finally reported in the table.
 
3
Since we use the transformed versions of these variables in Eq. (2), we also present the corresponding cointegration results in Internet Appendix Table A2 to show that the results are qualitatively similar. We also substitute VIX with GPR and obtain similar Johansen cointegration test results, which are available upon request.
 
4
Estimates based on fixed lag selection for all our regressions are available upon request.
 
5
We report estimations that use k = 3: 3 leads and 3 lags. We also try with various lead/lag length in implementing the DOLS regression in Eq. (2) and our main conclusions remain unchanged.
 
6
In the internet Appendix Table A5, when we include both country and year fixed effects, all our inferences for the long-run model remain unaffected with the exception that the coefficient of oil is still negative for oil-importers but becomes statistically insignificant (coefficient = -1.193; t-statistic = -0.84).
 
7
Pooled estimations in the supplemental appendix of Narayan (2019) in Table A6 with structural breaks show that the short-run response of the stock market appears mostly negative for oil-exporters (at longer lags) in the 2 subsamples, a counterintuitive result, and mostly negative (at various lags) for oil-importers in the 3 subsamples.
 
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Metadata
Title
Stock and oil price returns in international markets: Identifying short and long-run effects
Authors
Theophilus Teye Osah
Andre Varella Mollick
Publication date
17-08-2022
Publisher
Springer US
Published in
Journal of Economics and Finance
Print ISSN: 1055-0925
Electronic ISSN: 1938-9744
DOI
https://doi.org/10.1007/s12197-022-09602-x

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