Do oil price shocks have any implications for stock return momentum?

Abstract

The study examines the implications of structural oil price shocks on one of the most widely observed and pervasive momentum anomalies. We use a structural vector autoregression (SVAR) model to find the time-varying responses of momentum payoffs of India, Japan, the UK, and the US to different structural oil shocks—oil supply global aggregate demand shock, speculative shock, and other oil demand shocks. Structural oil shocks, particularly oil demand and speculative shocks, have important implications as conditioning information in predicting stock return momentum behavior according to the conditional asset pricing model. Overall, the results indicate that structural oil shocks have a significant impact on small cap and loser stock portfolios. Our findings have crucial implications to develop effective momentum investment strategies that consider structural oil shocks as conditioning information.