Oil price shocks and stock market returns: Evidence for some European countries

Abstract

In this paper we examine the impact of oil price shocks on stock returns in 12 oil importing European economies using Vector Autoregressive (VAR) and Vector Error Correction Models (VECM) for the period 1973:02–2011:12. We propose an alternative oil price shock specification that takes into account both world oil production and world oil prices in order to disentangle oil supply and oil demand shocks. We find that the response of the European real stock returns to an oil price shock may differ greatly depending on the underlying causes of the oil price change. The results suggest the existence of a negative and significant impact of oil price changes on most European stock market returns. Furthermore, we find that stock market returns are mostly driven by oil supply shocks.