Will the oil price change damage the stock market in a bull market? A re-examination of their conditional relationships

Abstract

This paper applies Markov-switching method to identify bear and bull market regimes and adopts interactive double-dummy variable approach to re-investigate the conditional relationship between the real oil price return and the international real stock return in 15 OECD countries when the sample is split into bear markets and bull markets. The empirical results indicate that, once the stock index is in the bull trend, an increase in oil price cannot affect the real stock return, while a decrease in oil price can lead to higher stock returns. On the contrary, if the stock market is in the bear era, the oil price growth cannot significantly affect the stock returns. Remarkably, oil price shocks cannot always damage the broad stock index, especially in a bull market era. Furthermore, regardless of the oil price shock, long-term investors need not adopt any policy and strategy to reduce the impact of the oil price on the stock market because the effect of a bull stock market will weaken the negative effect of an oil price shock. On the other hand, regardless of oil price shocks, when the stock market exhibits a bear trend, investors should adopt coping policies and strategies to avoid the impact of other non-oil factors shock, such as declines in real GDP to the stock market in the 15 selected countries. Clearly, regardless of whether the stock market exhibits a bear trend or a bull trend, the stock market trend will surpass the effect of an oil price shock.