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

38 Pages Posted: 2 Oct 2017

See all articles by Syed Abul Basher

Syed Abul Basher

East West University

Alfred A. Haug

University of Otago - School of Business - Department of Economics

Perry Sadorsky

York University - Schulich School of Business

Date Written: September 29, 2017

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 fully-identified 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.

Keywords: Markov-switching, oil-exporting countries, oil-market shocks, stock returns

JEL Classification: E44, G15, Q43

Suggested Citation

Basher, Syed Abul and Haug, Alfred A. and Sadorsky, Perry, The Impact of Oil-Market Shocks on Stock Returns in Major Oil-Exporting Countries: A Markov Switching Approach (September 29, 2017). Available at SSRN: https://ssrn.com/abstract=3046052 or http://dx.doi.org/10.2139/ssrn.3046052

Syed Abul Basher

East West University ( email )

Aftabnagar Main Road
Plot No. A-2
Dhaka, 1219
Bangladesh

HOME PAGE: http://syedbasher.org

Alfred A. Haug (Contact Author)

University of Otago - School of Business - Department of Economics ( email )

PO Box 56
Dunedin
New Zealand

Perry Sadorsky

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

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