Oil price shocks and OECD equity markets: distinguishing between supply and demand effects

Abstract

With the recent changes in international financial markets, investors and policy-makers are paying special attention to the relationship between oil price shocks and equity markets. This paper investigates how oil supply and oil demand shocks interact with OECD countries and macroeconomic variables within a cointegration vector error correction framework, which provides extreme flexibility with a parsimonious specification. By defining oil supply and oil demand shocks as endogenous variables, our proposed model allows us to gauge the shock transmission among the system variables through time and investigate the direct and indirect connections between oil price shocks and stock returns. We are also able to observe the long-run relationship between real stock prices and real oil prices measured by world and local prices. Our empirical findings show that the impact of oil price shocks substantially differs among the countries and that the significance of the results differs among the oil price specifications (real national oil price, world oil price, supply shocks and demand shocks).

The impact of refinery and oil demand shocks on the motor fuel market in Sweden

“…Furthermore, most previous studies on Sweden (including studies on organisation for economic co‐operation and development (OECD) countries, where Sweden is in the dataset) focused on estimating transport fuel price and income elasticities (e.g., Brännlund & Nordström, 2004; Karimu, 2014; Sterner, 1991; Sterner, Dahl, & Franzén, 1992), with no analysis on the impact of oil demand shocks or refinery shocks on the domestic motor fuel market. The other studies that included Sweden in their analysis of crude oil demand/or supply shocks on selected macroeconomic variables (e.g., Cashin et al, 2012; Dhaoui & Saidi, 2015), did not consider the domestic transport fuel market in the analysis. For instance, Dhaoui and Saidi (2015) focused on oil demand and supply shocks on stock prices, while Cashin et al (2012) considered both supply‐and‐demand‐driven oil price shocks on inflation, exchange rate and GDP, which no separate analysis was done for Sweden but rather aggregated into European major importing countries as a group.…”

“…The other studies that included Sweden in their analysis of crude oil demand/or supply shocks on selected macroeconomic variables (e.g., Cashin et al, 2012; Dhaoui & Saidi, 2015), did not consider the domestic transport fuel market in the analysis. For instance, Dhaoui and Saidi (2015) focused on oil demand and supply shocks on stock prices, while Cashin et al (2012) considered both supply‐and‐demand‐driven oil price shocks on inflation, exchange rate and GDP, which no separate analysis was done for Sweden but rather aggregated into European major importing countries as a group. It is therefore important to provide information on the link between the oil and motor fuel market in Sweden, which is at least different from the exiting information, mostly focused on motor fuel price and income elasticities.…”