Abstract
This paper analysed the relation between the stock market indices and the developments in the international energy market using historical monthly data from January 1985 to December 2017. Energy prices as applied in the study are composed of changes in the prices of crude oil, natural gas and liquefied natural gas. We employed the traditional VAR techniques in estimating the linkages between the variables of interest. Our findings showed that changes in energy prices did not have significant influence on the stock market. Although there was evidence of a long-run relationship between the two variables, no causal relationship was found to exist between them; this entails that past values of the prices of crude oil, natural gas and liquefied natural gas were not vital in predicting the developments in the stock market. Likewise, lagged values of the stock market indices were not instrumental in forecasting the movements in energy prices. Thus, we conclude that the stock market could be more responsiveness to other macroeconomic indicators other than the energy prices.
Highlights
INTRODUCTIONFluctuations in the energy prices are often considered a key factor for understanding changes in stock prices, there is no consensus about the relation between stock prices and the prices of energy among researchers (Kilian and Park, 2009). Basher and Sadorsky (2006), for example, concluded that oil price risk impacts stock price returns in emerging markets. El-Sharif et al (2005) posit that the relationship between oil price uncertainties and changes in stock market returns is always positive, often highly significant and reflects the direct impact of volatility in the price of crude oil on share values within the sector
Since we have no evidence of cointegration, we analyse the causal influence using the vector autoregressive (VAR) Granger causality test
The breakpoint test showed that stock market returns has structural break in January 2009 while the break date for changes in crude oil prices (COP) was August 1990
Summary
Fluctuations in the energy prices are often considered a key factor for understanding changes in stock prices, there is no consensus about the relation between stock prices and the prices of energy among researchers (Kilian and Park, 2009). Basher and Sadorsky (2006), for example, concluded that oil price risk impacts stock price returns in emerging markets. El-Sharif et al (2005) posit that the relationship between oil price uncertainties and changes in stock market returns is always positive, often highly significant and reflects the direct impact of volatility in the price of crude oil on share values within the sector. El-Sharif et al (2005) posit that the relationship between oil price uncertainties and changes in stock market returns is always positive, often highly significant and reflects the direct impact of volatility in the price of crude oil on share values within the sector. Kilian and Park (2009) contends that the reaction of U.S real stock returns to an oil price shock differs greatly depending on whether the change in the price of oil is driven by demand or supply shocks in the oil market. The study found significant negative oil price sensitivity in the Paper In what appears to be a confirmation of the findings in U.S and Australia, Sadorsky (2001) used a multifactor market model to estimate the expected returns to Canadian oil and gas industry stock prices. Results presented showed that an increase in the market or oil price factor increases the return to Canadian oil and gas stock prices
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