Time-Varying Effect of Oil Market Shocks on the Stock Market

46 Pages Posted: 27 Aug 2015 Last revised: 28 Aug 2015

See all articles by Wensheng Kang

Wensheng Kang

Ronald A. Ratti

Western Sydney University - Department of Economics & Finance

Kyung Hwan Yoon

Western Sydney University - Department of Economics & Finance

Date Written: August 25, 2015

Abstract

A mixture innovation time-varying parameter VAR model is used to examine the impact of structural oil price shocks on U.S. stock market return. Time variation is evident in both the coefficients and the variance-covariance matrix. The standard deviations of the demand side structural shocks reached forty year peaks during the global financial crisis and have remained high since. In the real stock return equation the coefficient of global real economic activity has declined since the late 1990s and that of oil-market specific demand oil shock has been lower since the early 1990s than before. The structural oil shocks account for 25.7% of the long-run variation in real stock returns overall, with substantial change in levels and sources of contribution over time. The contribution of shocks to global real economic activity to real stock return variation rose sharply to 22% in 2009 (and remains 17% over 2009-2012). The contribution of oil-market specific demand price shocks rose unevenly from 5% in the mid-1970s to about 15% in 2007, with a subsequent decline. The contribution of oil supply shocks has trended downward from 17% to 5% over 1973-2012.

Keywords: mixture innovation, oil shocks, real stock return, time-varying parameter VAR

JEL Classification: E44, G10, Q41, Q43

Suggested Citation

Kang, Wensheng and Ratti, Ronald A. and Yoon, Kyung Hwan, Time-Varying Effect of Oil Market Shocks on the Stock Market (August 25, 2015). CAMA Working Paper No. 35/2015, Available at SSRN: https://ssrn.com/abstract=2650908 or http://dx.doi.org/10.2139/ssrn.2650908

Ronald A. Ratti (Contact Author)

Western Sydney University - Department of Economics & Finance ( email )

Sydney, NSW 1797
Australia

Kyung Hwan Yoon

Western Sydney University - Department of Economics & Finance ( email )

Sydney, NSW 1797
Australia

No contact information is available for Wensheng Kang

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