Oil Prices and the Stock Market
Robert C. Ready
University of Rochester - Simon Business School
June 13, 2014
This paper develops a novel method for classifying oil price changes as supply or demand driven. Motivated by a simple model and empirical results, demand shocks are identified as returns to an index of oil producing firms which are orthogonal to unexpected changes in the VIX index, with supply shocks capturing the remaining variation in oil prices. Demand shocks are strongly positively correlated with market returns and economic output, while supply shocks have a strong negative correlation. The negative correlation of supply shocks and returns is strongest in firms which produce consumer goods, and in oil importing countries.
Number of Pages in PDF File: 58
Keywords: Oil Prices, Stock Returns, Supply and Demand
JEL Classification: J12, Q43
Date posted: September 2, 2012 ; Last revised: June 18, 2014
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