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

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Date posted: September 2, 2012 ; Last revised: June 18, 2014

Suggested Citation

Ready, Robert C., Oil Prices and the Stock Market (June 13, 2014). Available at SSRN: http://ssrn.com/abstract=2140034 or http://dx.doi.org/10.2139/ssrn.2140034

Contact Information

Robert C. Ready (Contact Author)
University of Rochester - Simon Business School ( email )
Rochester, NY 14627
United States
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