Abstract
The link between crude oil price and stock returns of the Group of Seven (G7) countries (Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States) was analyzed in this study using monthly data from January 1999 to March 2020. We adopt a similar approach to Kilian (Am Econ Rev 99(3):1053–1069, 2009) and construct a structural vector autoregression framework to decompose crude oil price shocks into oil supply shock, oil aggregate demand shock, and oil-specific demand shock. We then explore the distinct effects of different kinds of oil price shocks from various sources.Based on the decomposed oil price shocks, we apply the connectedness approach and QQ regression to find time-varying co-movements and tail dependence between oil price shocks and G7 stock returns.There is no general correlation between the decomposed oil prices and stock returns in these countries. The effects of oil price shocks on stock returns across different stock market conditions appear to be heterogeneous. Oil supply shock appears to be a net transmitter of spillover effects for all G7 countries within the sample period.
Highlights
In recent years, the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC oil producers have reduced oil production in an effort to drive up oil prices
Results are based on a time-varying parameter vector autoregression (TVP-vector autoregression (VAR)) with lag length of order 1 and a 10-step-ahead forecast
Results are based on a TVP-VAR with lag length of order 1 and a 10-step-ahead forecast oil demand is markedly affected by G7 stock returns (− 16.410%)
Summary
The Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC oil producers have reduced oil production in an effort to drive up oil prices. Since oil is an input factor, an increase in price raises the production costs of enterprises from oil-importing countries. The extension of production costs could reduce the profits of companies and lead to a decline in corporate output. Oil price volatility significantly affects inflation (Cuñado and De Gracia 2005; Cuñado et al 2015), which decreases consumption by allowing consumers to cut expenditures in other areas (Narayan and Narayan 2007; Leung 2010). In addition to its general attributes as a commodity, crude oil can be viewed as a strategic material. The volatility of oil price and supply are significantly affected by political situations. Recent political multi-polarization and internationalization of the
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