Betting on War? Oil Prices, Stock Returns and Extreme Geopolitical Events

40 Pages Posted: 3 Jul 2023 Last revised: 6 Jul 2023

See all articles by Knut Nygaard

Knut Nygaard

Oslo Business School at Oslo Metropolitan University

Lars Qvigstad Sørensen

Storebrand Asset Management

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Abstract

We show that the ability of oil price changes to predict stock returns is largely limited to five extreme geopolitical events: the 2022 invasion of Ukraine, the 2003 invasion of Iraq, the 1990/91 Persian gulf war, the 1986 OPEC collapse, and the 1973 Arab-Israel war. In the counterfactual scenario where these events did not occur, the t-statistics are reduced on average 75% as compared to that reported by Driesprong, Jacobsen, and Maat (2008). We also find that a market-timing trading strategy based on oil price changes typically generates insignificant abnormal returns, contradicting previously published results. Our findings serve as an example of how a significant predictor in a time series forecasting regression does not necessarily constitute a useful or profitable market-timing signal.

Keywords: Return predictability, oil prices, International stock markets, Market efficiency, Stock returns

JEL Classification: G11, G14, G15, G17

Suggested Citation

Nygaard, Knut and Sørensen, Lars Qvigstad, Betting on War? Oil Prices, Stock Returns and Extreme Geopolitical Events. Available at SSRN: https://ssrn.com/abstract=4499082 or http://dx.doi.org/10.2139/ssrn.4499082

Knut Nygaard (Contact Author)

Oslo Business School at Oslo Metropolitan University ( email )

Pilestredet 35
Oslo, 0167
Norway

Lars Qvigstad Sørensen

Storebrand Asset Management ( email )

Professor Kohts vei 9
Lysaker, 1366
Norway

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