Oil Prices and the Stock Market

41 Pages Posted: 2 Sep 2012 Last revised: 18 Jun 2014

Robert C. Ready

University of Rochester - Simon Business School

Date Written: June 13, 2014

Abstract

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.

Keywords: Oil Prices, Stock Returns, Supply and Demand

JEL Classification: J12, Q43

Suggested Citation

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

Robert C. Ready (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

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