The impact of oil shocks on the stock market

Abstract

This paper investigates the reaction of real stock returns and their volatility in the three main euro area economies (France, Germany and Italy), the U.K. and the U.S. to oil price changes caused by different shocks in the supply-side and demand-side of the global crude oil market, including the shock on the demand for oil inventories. Our findings suggest that the impact of oil supply and aggregate demand shocks on real stock returns and volatility are not altered when oil inventories are explicitly considered in the modeling of global crude oil market. However, the effects of oil-specific demand shocks on real stock returns are modified by the inclusion of oil inventories in the model, stressing the importance of the uncertainty channel in the link between the oil and stock markets. Finally, oil inventory shocks have a negative impact at medium time horizons on real stock returns, as the surge in the price of oil causes depletion of inventories.