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Oil Price Shocks and Stock Market Returns: A study on Portugal, Ireland, Italy, Greece and Spain.

Brose Olsen, Anette LU and Henriz, Paul LU (2014) NEKN01 20141
Department of Economics
Abstract
Following the oil price shocks of the 1970s, a great deal of research has been focused on the relationship between oil price changes and macroeconomic variables. However, the body of literature focusing on oil price shocks and stock markets are more limited. In our thesis, we have decided to focus on five OECD countries: Portugal, Ireland, Italy, Greece and Spain, commonly known as the PIIGS economies in financial markets due to their high levels of debt and budget deficits in the aftermath of the Eurozone crisis of 2008/2009.

The primary purpose of this study is to examine the relationship between oil price shocks and stock market returns. We employ an unrestricted vector autoregressive (VAR) model containing five variables in order to... (More)
Following the oil price shocks of the 1970s, a great deal of research has been focused on the relationship between oil price changes and macroeconomic variables. However, the body of literature focusing on oil price shocks and stock markets are more limited. In our thesis, we have decided to focus on five OECD countries: Portugal, Ireland, Italy, Greece and Spain, commonly known as the PIIGS economies in financial markets due to their high levels of debt and budget deficits in the aftermath of the Eurozone crisis of 2008/2009.

The primary purpose of this study is to examine the relationship between oil price shocks and stock market returns. We employ an unrestricted vector autoregressive (VAR) model containing five variables in order to assess the different effects. We have chosen a linear specification of the world real oil price, and also included other variables connected to stock market returns. These variables are short-term interest rate, long-term interest rate and industrial production. The sample period contains monthly observations from 1993m07 to 2014m01. We have also divided the sample into a subsample covering the years from 1993m07 to 2008m08, to be able to compare the period with and without the financial crisis. Our main results show indications of a negative impact of linear oil price shocks on real stock returns in all countries. This effect was, however, statistically insignificant. The same applies for the interest rates. When dividing the sample, and excluding the financial crisis, we saw from the forecast error variance decomposition results an increase in the contribution of the real oil price to the variability in real stock returns. (Less)
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author
Brose Olsen, Anette LU and Henriz, Paul LU
supervisor
organization
course
NEKN01 20141
year
type
H1 - Master's Degree (One Year)
subject
keywords
Oil Price Shock, Stock Market Returns, Unit Root, Vector Autoregressive model, Variance Decomposition, Impulse Response
language
English
id
4616229
date added to LUP
2014-09-22 11:44:34
date last changed
2014-09-22 11:44:34
@misc{4616229,
  abstract     = {Following the oil price shocks of the 1970s, a great deal of research has been focused on the relationship between oil price changes and macroeconomic variables. However, the body of literature focusing on oil price shocks and stock markets are more limited. In our thesis, we have decided to focus on five OECD countries: Portugal, Ireland, Italy, Greece and Spain, commonly known as the PIIGS economies in financial markets due to their high levels of debt and budget deficits in the aftermath of the Eurozone crisis of 2008/2009.

The primary purpose of this study is to examine the relationship between oil price shocks and stock market returns. We employ an unrestricted vector autoregressive (VAR) model containing five variables in order to assess the different effects. We have chosen a linear specification of the world real oil price, and also included other variables connected to stock market returns. These variables are short-term interest rate, long-term interest rate and industrial production. The sample period contains monthly observations from 1993m07 to 2014m01. We have also divided the sample into a subsample covering the years from 1993m07 to 2008m08, to be able to compare the period with and without the financial crisis. Our main results show indications of a negative impact of linear oil price shocks on real stock returns in all countries. This effect was, however, statistically insignificant. The same applies for the interest rates. When dividing the sample, and excluding the financial crisis, we saw from the forecast error variance decomposition results an increase in the contribution of the real oil price to the variability in real stock returns.},
  author       = {Brose Olsen, Anette and Henriz, Paul},
  keyword      = {Oil Price Shock,Stock Market Returns,Unit Root,Vector Autoregressive model,Variance Decomposition,Impulse Response},
  language     = {eng},
  note         = {Student Paper},
  title        = {Oil Price Shocks and Stock Market Returns: A study on Portugal, Ireland, Italy, Greece and Spain.},
  year         = {2014},
}