Which oil shocks really matter in equity markets?
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Description
This paper examines the relationship between structural oil shocks and US equity markets. The recent oil shock decomposition of Ready (2018) is reconsidered and refined, providing a clearer delineation between shocks to equity market discount rates and aggregate demand, leading to an oil shock specification which attributes substantially more explanatory power to the latter in explaining equity market variation. Providing links with the literature dating back to Kilian and Park (2009), an explicit role is given to precautionary demand shocks using an independent measure constructed from oil futures data, reducing the role of the supply shocks obtained as the final residual in the recursive identification scheme. In an extended sample that allows an analysis of the oil/equity market relationship since the global financial crisis, the modified aggregate demand shocks have approximately twice as much explanatory power for stock return variation than the demand shocks of Ready (2018). The importance of these shocks in driving oil price changes and equity market volatility has only increased since the financial crisis, with the role of supply shocks diminishing. Once these demand effects are accounted for, there is little relationship between precautionary demand shocks and equity returns, in contrast to the existing literature.
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ID Code: | 128372 | ||||
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Item Type: | Contribution to Journal (Journal Article) | ||||
Refereed: | Yes | ||||
ORCID iD: |
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Measurements or Duration: | 8 pages | ||||
Keywords: | Precautionary demand, Stock markets, Supply and demand shocks, Volatility | ||||
DOI: | 10.1016/j.eneco.2019.03.026 | ||||
ISSN: | 0140-9883 | ||||
Pure ID: | 40806962 | ||||
Divisions: | Past > QUT Faculties & Divisions > QUT Business School Current > Schools > School of Economics & Finance |
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Copyright Owner: | Consult author(s) regarding copyright matters | ||||
Copyright Statement: | This work is covered by copyright. Unless the document is being made available under a Creative Commons Licence, you must assume that re-use is limited to personal use and that permission from the copyright owner must be obtained for all other uses. If the document is available under a Creative Commons License (or other specified license) then refer to the Licence for details of permitted re-use. It is a condition of access that users recognise and abide by the legal requirements associated with these rights. If you believe that this work infringes copyright please provide details by email to qut.copyright@qut.edu.au | ||||
Deposited On: | 09 Apr 2019 04:32 | ||||
Last Modified: | 05 Jun 2024 02:24 |
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