Abstract
Using monthly returns of ten S&P 500 sectoral indices from January 1990 to January 2015, I examine the impact of demand and supply shocks of oil on the stock market. I confirm that positive shocks to U.S. production of oil and economic activity have a significant and positive influence on stock returns. Moreover, the negative and persistent effect of real oil price shocks on all sectoral indices except energy and utility found by this study. I also examine the impact of oil price volatility on stock returns. Oil price volatility has a negative and significant effect on all industries, even oil-related and oil substitutes. In addition, I get the VAR estimations for the crisis period and find that there is a substantial increase in the role of oil price shocks in the decomposition of stock returns of all sectors. Furthermore, stock returns are better explained by U.S. oil production shocks than other shocks in most sectors over the financial crisis time period. In addition, I find the asymmetric effects of oil shocks are applicable to only two out of ten sectors, implying the effect of oil price return on equity returns only in the energy and utility sectors are not asymmetric.
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