Understanding interlinkages between petroleum prices and equity markets: A comprehensive survey of empirical evidence

Abstract

The multifaceted interrelationship between petroleum prices and equity markets has been a subject of immense interest. The current paper offers an extensive review of a plethora of empirical studies in this strand of literature. By revealing various research themes, our survey points to diverse findings that are sector- and country-specific, and contingent on employed methodologies, data frequencies and time horizons. More precisely, petroleum price changes and shocks exert direct or indirect effects dictated by the level of petroleum dependency across sectors and the countries’ position as a net petroleum exporter or importer. The interlinkages tend to display the time-varying nature and sensitivity to major market events. In addition, volatility is not solely spilled from petroleum to equity markets, but it also observed to transmit in the reverse direction. The importance of incorporating asymmetries is documented. Finally, a few directions for expanding the existing research are proposed.

Keywords: Petroleum prices, Aggregate equity market returns, Equity sector returns, Petroleum price shocks, Volatility transmission, Petroleum exporters, Petroleum importers

JEL Classification: G11, G12, Q43