The Impact of Oil-Market Shocks on Stock Returns in Major Oil-Exporting Countries: A Markov Switching Approach

Abstract

The impact that oil shocks have on stock prices in oil exporting countries has implications for both domestic and international investors. We derive the shocks driving oil prices from a fullyidentified structural model of the oil market. We study their nonlinear relationship with stock market returns in major oil-exporting countries in a multi-factor Markov-switching framework. Flow oil-demand shocks have a statistically significant impact on stock returns in Canada, Norway, Russia, Kuwait, Saudi Arabia, and the UAE. Idiosyncratic oil-market shocks affect stock returns in Norway, Russia, Kuwait, Saudi Arabia and UAE. Speculative oil shocks impact stock returns in Canada, Russia, Kuwait and the UAE. Flow oil-supply shocks matter for the UK, Kuwait, and UAE. Mexico is the only country where stock returns are unaffected by oil shocks. These results shed important light on investor sentiment toward the relationship between oil shocks and stock markets in oil exporting countries. JEL Classification: E44, G15, Q43

Long Run Association of Stock Prices and Crude Oil Prices: Evidence From Saudi Arabia

“…The study applied detrended moving average method on weekly data and the results showed a nonlinear association. Basher et al (2017) studied the connection between oil and stock prices for oil exporting countries including Saudi Arabia using monthly data using structural VAR model and Markov-switching model. For Saudi Arabia, oil demand shocks influence stock returns significantly.…”

Exchange rates of oil exporting countries and global oil price shocks: a nonlinear smooth-transition approach

“…Flexible nonlinear functional forms can be specified for alternative processes for such smooth transition regression models that are symmetric or asymmetric for adjustments in response to negative and positive changes (Teräsvirta et al, 2010). An alternative nonlinear model is a Markov-switching model that determines regimes from the data as well, pursued in Basher et al (2016) and Basher et al (2017).…”

Impact of Oil Prices on Stock Market Performance: Evidence from Top Oil Importing Countries

“…Anticipated inflation and real rates of interest have entirely relied on the nominal interest rates. These prices relied on supply connections and aggregate demand connections in an economy, which are affected by fiscal and monetary policies as well as trade effects comprehensively (Basher, Haug, & Sadorsky, 2017).…”

“…Their results indicated that escalation of revenue leads towards the escalated spending of the government at the first level. Basher et al (2017) tried to predict the activities of the economy by analyzing shocks of oil price, in the Nigerian settings through applying the VAR model. The findings exhibit that any escalation of oil prices directly moves in the direction of increased spending of the government, inflation, and industrial production growth.…”