Striking Oil: Another Puzzle?

43 Pages Posted: 14 Aug 2005

See all articles by Gerben Driesprong

Gerben Driesprong

Erasmus University Rotterdam - Rotterdam School of Management

Ben Jacobsen

Tilburg University - TIAS School for Business and Society; Massey University

Benjamin Maat

APG Asset Management

Multiple version iconThere are 3 versions of this paper

Date Written: July 2007

Abstract

Changes in oil prices predict stock market returns worldwide. In our thirty year sample of monthly returns for developed stock markets, we find statistically significant predictability for twelve out of eighteen countries as well as for the world market index. Results are similar for our shorter time series of emerging markets. We find no evidence that our results can be explained by time varying risk premia. Even though oil price shocks increase risk, investors seem to underreact to information in the price of oil: a rise in oil prices does not lead to higher stock market returns, but drastically lowers returns. For instance, an oil price shock of one standard deviation (around 10 percent) predictably lowers world market returns by one percent. Oil price changes also significantly predict negative excess returns. Our findings are consistent with the hypothesis of a delayed reaction by investors to oil price changes. In line with this hypothesis the relation between monthly stock returns and lagged monthly oil price changes becomes substantially stronger once we introduce lags of several trading days between monthly stock returns and lagged monthly oil price changes.

Keywords: Return Predictability, Oil Prices, International Stock Markets, Market Efficiency, Stock Returns, Underreaction

JEL Classification: M, G3, G1

Suggested Citation

Driesprong, Gerben and Jacobsen, Ben and Maat, Benjamin, Striking Oil: Another Puzzle? (July 2007). EFA 2005 Moscow Meetings Paper. Available at SSRN: https://ssrn.com/abstract=460500 or http://dx.doi.org/10.2139/ssrn.460500

Gerben Driesprong

Erasmus University Rotterdam - Rotterdam School of Management ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands
+31 10 4081817 (Phone)
+31 10 4089017 (Fax)

Ben Jacobsen (Contact Author)

Tilburg University - TIAS School for Business and Society ( email )

Warandelaan 2
TIAS Building
Tilburg, Noord Brabant 5037 AB
Netherlands

Massey University ( email )

Auckland
New Zealand

Benjamin Maat

APG Asset Management ( email )

P.O. Box 75283
Amsterdam, 1070 AG
Netherlands
+31(0)206048302 (Fax)

HOME PAGE: http://nl.linkedin.com/pub/benjamin-maat/6/17b/126

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