Oil Prices and Stock Market Anomalies

Posted: 17 Aug 2019

See all articles by Muhammad A. Cheema

Muhammad A. Cheema

University of Waikato New Zealand

Frank Scrimgeour

University of Waikato - Management School

Multiple version iconThere are 2 versions of this paper

Date Written: August 14, 2019

Abstract

This paper examines the relationship between oil prices and stock market anomalies in China, the largest oil importer country in the world. Prior literature documents both a positive and negative relationship between oil prices and the stock market. The explanation of a positive relationship is supported by the argument that rising oil prices are interpreted as a positive signal by investors, especially when the rise in oil prices is associated with a higher demand for oil. Consequently, rising oil prices lead stock prices above their fundamental values and that they subsequently correct. Therefore, we hypothesise that stock market anomalies are stronger following rising oil prices when the rise in oil prices is due to the higher demand for oil since returns associated with anomalies reflect mispricing. The results, consistent with the hypothesis, show stronger return predictability for individual anomalies following an increase in oil prices than for a decrease in oil prices. The results are even stronger once we construct a mispricing score based on composite mispricing of all the anomalies.

Keywords: oil prices, stock market anomalies, mispricing score, Chinese stock market

JEL Classification: G14, G15, Q43

Suggested Citation

Cheema, Muhammad A. and Scrimgeour, Frank, Oil Prices and Stock Market Anomalies (August 14, 2019). Energy Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3437190

Muhammad A. Cheema (Contact Author)

University of Waikato New Zealand ( email )

Hamilton, 3216
New Zealand

Frank Scrimgeour

University of Waikato - Management School ( email )

Hamilton
New Zealand

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