Abstract
In this paper we examine the causal relationship between short term economic indicators, stock market indexes and oil and gas stocks returns. We postulate that economic indicators positively and significantly cause and predict stock market indexes and oil and gas stock returns in short run. In addition, we posit that stock market indexes cause and predict oil and gas stock returns in short run. To test our hypotheses we chose four short-term economic indicators, two stock market indexes, and 10 oil and gas companies. Our results indicate that there is no causal relationship between both short-term economic indicators and stock market indexes, and between short-term economic indicators and oil and gas stock returns. However, we receive support to one of our hypotheses that stock market indexes cause oil and gas stock returns. This causation is contemporaneous only and we observe that stock market indexes lack short-term predictive power of oil and gas stock returns. We conclude that investors need to be vigilant in considering coincident indicators as explanatory variables to predict stock returns. We suggest that stock market indexes are helpful to predict contemporaneous returns but not future returns of oil and gas stocks.
 JEL Classification: B1, C32, D4, G2.
Highlights
Stock market index is viewed as a leading economic indicator and Index of Industrial Production (IIP) is viewed as a coincident or contemporaneous economic indicator
We find no causal relation between short-term economic indicators and stock market indexes
We do not find any causation between short-term economic indicators and oil and gas stocks. These results indicate that stock markets and oil and gas stocks are independent from industrial production
Summary
Stock market index is viewed as a leading economic indicator and Index of Industrial Production (IIP) is viewed as a coincident or contemporaneous economic indicator. Few studies examine the causal relationship between stock market index and industrial production. We notice that most of the studies examine the relationship between economic factors and stock market movements rather than analyzing the influence of economic factors on individual stocks. We observe that there is limited research that examines the causal relationship between index of industrial production, stock market index, and individual stock returns. A positive movement in stock market represents investors optimistic outlook, and a negative movement indicates investors’ pessimistic outlook. Our proposition is that high industrial production raise companies sales and profits, enhances investors optimism and leads to positive movement in stock market which rightly result in rise in stock returns. We postulate that stock returns are influenced by stock market movements and by IIP which constitute the aggregate of manufacturing, mining, and electricity production
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