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Energy Shocks and Financial Markets

Journal of Futures Markets, Vol. 16, No. 1, pp. 1-27, 1996

38 Pages Posted: 16 May 2006  

Roger D. Huang

University of Notre Dame

Ronald W. Masulis

University of New South Wales - Australian School of Business; European Corporate Governance Institute (ECGI); Financial Research Network (FIRN); National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER)

Hans R. Stoll

Vanderbilt University - Finance

Abstract

This study analyzes the information transmission mechanism linking oil futures with stock prices, where we examine the lead and lag cross-correlations of returns in one market with the others. We investigate the dynamic interactions between oil futures prices traded on the New York Mercantile Exchange (NYMEX) and U.S. stock prices, which allows us to examine the effects of energy shocks on financial markets. In particular, we examine the extent to which these markets are contemporaneously correlated, with particular attention paid to the association of oil price indexes with the S&P 500 index; 12 major industry stock price indices and 3 individual oil company stock price series. We also examine the extent to which price changes or returns in one market dynamically lead returns in the others and whether volatility spillover effects exist across these markets. Using VAR model estimates for various time series of returns we find that petroleum industry stock index and our three oil company stocks are the only series where we can reject the null hypothesis that oil futures do not lead Treasury Bill rates and stock returns, while we can reject the hypothesis that oil futures lag these other two series. Finally, the return volatility evidence for oil futures leading individual oil company stocks is much weaker than is the evidence for returns themselves.

Keywords: Energy shocks, oil futures, oil price dynamics, stock price index dynamics, VAR model, return volatility

JEL Classification: C22, D84, E44, G14

Suggested Citation

Huang, Roger D. and Masulis, Ronald W. and Stoll, Hans R., Energy Shocks and Financial Markets. Journal of Futures Markets, Vol. 16, No. 1, pp. 1-27, 1996. Available at SSRN: https://ssrn.com/abstract=900741

Roger D. Huang

University of Notre Dame ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States
574-631-6370 (Phone)

Ronald W. Masulis (Contact Author)

University of New South Wales - Australian School of Business ( email )

Sydney, NSW 2052
Australia
612-9385-5860 (Phone)
612-9385-6347 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER) ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

Hans R. Stoll

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States
615-322-3671 (Phone)
615-343-7177 (Fax)

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