Abstract
From mid-2014 to 2016, oil prices plunged rapidly causing significant volatility in the US and global equity markets. This change in crude oil prices occurred after a significant run up in oil prices three to four years earlier. Each change in the growth trajectory of oil prices affects stock market returns. How and why do oil price shocks affect the expected stock market returns among key sectors of the economy? This paper explores this issue by examining how the magnitude of crude oil price changes affects the stock market returns and variances of key producing, banking and consuming segments of the US economy. Our findings provide some explanations for the asymmetric responses to positive and negative oil shocks found in these key sectors of the economy.
Highlights
Starting in mid-2014 crude oil prices began to plunge causing dislocation in many parts of the US and world economy
Our findings provide some explanations for the asymmetric responses to positive and negative oil shocks found in these key sectors of the economy
This study examined the effects of long-term changes in crude oil prices on stock prices in the US producer, consumer and banking sectors
Summary
Starting in mid-2014 crude oil prices began to plunge causing dislocation in many parts of the US and world economy. Key parts of the oil and gas complex were drastically impacted by the plunge in oil prices; in addition, other parts of the economy, the banking and oil consuming sectors, were affected. Explanations for changes in crude oil prices vary, depending on the duration, direction, timing, and depth of the shock. Demand shocks can be caused by macroeconomic concerns, recessions, or changing usage among key oil consuming countries. Often, it is unclear whether severe oil price fluctuations are due to short or medium-term cyclical changes, or longer-term structural adjustments. The same can be said for positive increases in crude oil demand or positive oil shocks
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