Oil Prices and the Stock Market
Robert C. Ready
Simon Business School, University of Rochester
December 17, 2013
This paper develops and finds support for a novel method for classifying oil price changes as supply or demand driven. Demand shocks are identified as returns to an index of oil producing firms which are orthogonal to unexpected changes in the VIX index. Supply shocks are oil price changes which are orthogonal to demand shocks and changes in the VIX. Demand shocks are strongly positively correlated with market returns, while supply shocks have a strong negative correlation. The negative effects of supply shocks are concentrated in firms which produce consumer goods, and are also strongest for oil importing countries.
Number of Pages in PDF File: 52
Keywords: Oil Prices, Stock Returns, Supply and Demand
JEL Classification: J12, Q43working papers series
Date posted: September 2, 2012 ; Last revised: December 20, 2013
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