From Oil to Stock Markets

Abstract

This study investigates the impacts of crude oil price variations on the French and American stock market returns using daily observations of Brent crude oil prices, the CAC40, and the Dow Jones Industrial Average indexes for the period of 1999~2012. Our results show strong evidence of fractional cointegration between oil and stock market indices, suggesting the presence of a relationship that governs their long-run joint movements. We find that dynamic correlations increase dramatically during crisis periods, but they move towards their initial levels after those periods. The effect of the lower oil price on the development of the global economy depends not only on whether the low price is expected to be temporary or persistent but also on the causes of the oil price fall. Market analysis shows that the new price levels of oil are caused by the simple mechanism of supply and demand. The low price of oil in 2014 is caused by reduced oil demand because of the slower economic growth in Chinese economy and the impact of developed world’s drive to reduce carbon emissions on the oil market. Given the country-specific dynamic links between oil and stock markets, policymakers may make appropriate policies to reduce the impact of adverse oil price effects on production and economic activities, while investors can optimally design their diversification and hedging strategies, considering oil price persistence patterns.