Oil price shocks and stock markets in the U.S. and 13 European countries

Abstract

Oil price shocks have a statistically significant impact on real stock returns contemporaneously and/or within the following month in the U.S. and 13 European countries over 1986:1–2005:12. Norway as an oil exporter shows a statistically significantly positive response of real stock returns to an oil price increase. The median result from variance decomposition analysis is that oil price shocks account for a statistically significant 6% of the volatility in real stock returns. For many European countries, but not for the U.S., increased volatility of oil prices significantly depresses real stock returns. The contribution of oil price shocks to variability in real stock returns in the U.S. and most other countries is greater than that of interest rate. An increase in real oil price is associated with a significant increase in the short-term interest rate in the U.S. and eight out of 13 European countries within one or two months. Counter to findings for the U.S. and for Norway, there is little evidence of asymmetric effects on real stock returns of positive and negative oil price shocks for oil importing European countries.