Crude oil and stock markets: Stability, instability, and bubbles ☆

We analyze the long-run relationship between the world price of crude oil and international stock markets over 1971:1-2008:3 using a cointegrated vector error correction model with additional regressors. Allowing for endogenously identified breaks in the cointegrating and error correction matrices, we find evidence for breaks after 1980:5, 1988:1, and 1999:9. There is a clear long-run relationship between these series for six OECD countries for 1971:1-1980.5 and 1988:2-1999.9, suggesting that stock market indices respond negatively to increases in the oil price in the long run. During 1980.6-1988.1, we find relationships that are not statistically significantly different from either zero or from the relationships of the previous period. The expected negative long-run relationship appears to disintegrate after 1999.9. This finding supports a conjecture of change in the relationship between real oil price and real stock prices in the last decade compared to earlier years, which may suggest the presence of several stock market bubbles and/or oil price bubbles since the turn of the century.

[1]  Jungseok Park,et al.  Oil price shocks and stock markets in the U.S. and 13 European countries , 2008 .

[2]  James D. Hamilton.  This is what happened to the oil price-macroeconomy relationship , 1996 .

[3]  Testing for cointegration between international stock prices , 2002 .

[4]  Jesus Gonzalo,et al.  Specification via model selection in vector error correction models , 1998 .

[5]  Kiseok Lee,et al.  Oil Shocks and the Macroeconomy: The Role of Price Variability* , 1995 .

[6]  Knut Anton Mork,et al.  Oil and the Macroeconomy When Prices Go Up and Down: An Extension of Hamilton's Results , 1989, Journal of Political Economy.

[7]  M. Salvador,et al.  SELECTING THE RANK OF THE COINTEGRATION SPACE AND THE FORM OF THE INTERCEPT USING AN INFORMATION CRITERION , 2002, Econometric Theory.

[8]  R. Terrell,et al.  The role of higher oil prices: A case of major developed countries , 2008 .

[9]  R. Rigobón,et al.  No Contagion, Only Interdependence: Measuring Stock Market Comovements , 2002 .

[10]  Matteo Manera,et al.  The Asymmetric Effects of Oil Shocks on Output Growth: A Markov-Switching Analysis for the G-7 Countries , 2006 .

[11]  M. Hooker.  This is what happened to the oil price-macroeconomy relationship: Reply , 1996 .

[12]  P. Phillips,et al.  Testing the null hypothesis of stationarity against the alternative of a unit root: How sure are we that economic time series have a unit root? , 1992 .

[13]  Juncal Cuñado Eizaguirre,et al.  Oil Prices, Economic Activity and Inflation: Evidence for Some Asian Countries , 2004 .

[14]  S. Johansen.  Likelihood-Based Inference in Cointegrated Vector Autoregressive Models , 1996 .

[15]  Ronald A. Ratti,et al.  Monetary policy, oil price shocks, and the Japanese economy , 2001 .

[16]  Evangelia Papapetrou.  Oil price shocks, stock market, economic activity and employment in Greece ☆ , 2001 .

[17]  Helmut Lütkepohl,et al.  Testing for the Cointegrating Rank of a VAR Process With Structural Shifts , 2000 .

[18]  Paul Leiby,et al.  Oil Price Shocks and the Macroeconomy: What Has Been Learned Since 1996 , 2004 .

[19]  Robert A. Korajczyk.  A Measure of Stock Market Integration for Developed and Emerging Markets , 1996 .

[20]  P. Phillips.  Testing for a Unit Root in Time Series Regression , 1988 .

[21]  Bent Nielsen,et al.  Cointegration Analysis in the Presence of Structural Breaks in the Deterministic Trend , 2000 .

[22]  Perry Sadorsky,et al.  Modeling and forecasting petroleum futures volatility , 2006 .

[23]  M. Boyer,et al.  Common and fundamental factors in stock returns of Canadian oil and gas companies , 2007 .

[24]  Bruce E. Hansen,et al.  Residual-based tests for cointegration in models with regime shifts , 1996 .

[25]  L. Kilian,et al.  The Impact of Oil Price Shocks on the U.S. Stock Market , 2007 .

[26]  L. Kilian.  A Comparison of the Effects of Exogenous Oil Supply Shocks on Output and Inflation in the G7 Countries , 2008 .

[27]  Matteo Manera,et al.  Oil Prices, Inflation and Interest Rates in a Structural Cointegrated VAR Model for the G-7 Countries , 2005 .

[28]  Mariam Camarero,et al.  Instability tests in cointegration relationships. An application to the term structure of interest rates , 2002 .

[29]  Lutz Kilian,et al.  Exogenous Oil Supply Shocks: How Big Are They and How Much Do They Matter for the U.S. Economy? , 2005, The Review of Economics and Statistics.

[30]  James D. Hamilton.  Oil and the Macroeconomy since World War II , 1983, Journal of Political Economy.

[31]  Olivier J. Blanchard,et al.  The Macroeconomic Effects of Oil Price Shocks: Why are the 2000s so Different from the 1970s? , 2007 .

[32]  Søren Johansen,et al.  Recursive Estimation in Cointegrated VAR-Models , 1992 .

[33]  Perry Sadorsky.  Oil price shocks and stock market activity , 1999 .

[34]  M. Gronwald.  Large Oil Shocks and the US Economy: Infrequent Incidents with Large Effects , 2008 .

[35]  John W. Galbraith,et al.  Testing for a Unit Root , 1993 .

[36]  Xu Cheng,et al.  Semiparametric Cointegrating Rank Selection , 2008 .

[37]  Olivier J. Blanchard,et al.  The Macroeconomic Effects of Oil Shocks: Why are the 2000s so Different from the 1970s? , 2007 .

[38]  Bill Nixon,et al.  Evidence on the nature and extent of the relationship between oil prices and equity values in the UK , 2005 .

[39]  S. Johansen.  STATISTICAL ANALYSIS OF COINTEGRATION VECTORS , 1988 .

[40]  S. Ross,et al.  Economic Forces and the Stock Market , 1986 .

[41]  Ronald W. Masulis,et al.  Energy Shocks and Financial Markets , 1996 .

[42]  David A. Bessler,et al.  A MONTE CARLO STUDY ON THE SELECTION OF COINTEGRATING RANK USING INFORMATION CRITERIA , 2005, Econometric Theory.

[43]  James D. Hamilton.  What is an Oil Shock? , 2000 .

[44]  Perry Sadorsky.  Risk factors in stock returns of Canadian oil and gas companies , 2001 .

[45]  Perry Sadorsky,et al.  Oil price risk and emerging stock markets , 2006 .

[46]  John C. Chao,et al.  Model selection in partially nonstationary vector autoregressive processes with reduced rank structure , 1999 .

[47]  Charles M. Jones,et al.  OIL AND THE STOCK MARKETS , 1996 .

[48]  Robert W. Faff,et al.  Does oil move equity prices? A global view , 2008 .

[49]  G. Kapetanios.  THE ASYMPTOTIC DISTRIBUTION OF THE COINTEGRATION RANK ESTIMATOR UNDER THE AKAIKE INFORMATION CRITERION , 2004, Econometric Theory.

[50]  Cetin Ciner,et al.  Energy Shocks and Financial Markets: Nonlinear Linkages , 2001 .

[51]  H. Lütkepohl,et al.  Testing for the Cointegrating Rank of a VAR Process with Level Shift at Unknown Time , 2004 .