IMPACT OF OIL PRICES ON STOCK MARKETS: EMPIRICAL EVIDENCE FROM SELECTED MAJOR OIL PRODUCING AND CONSUMING COUNTRIES
Northcentral University, Arizona, USA.
This paper analyzes the impact of oil prices on stock prices of selected major oil producing and consuming countries with nominal exchange rate as additional determinant. Daily stock prices, oil prices, and exchange rates for six countries (Mexico, Russia, Saudi Arabia, India, China, and the US.) from January 26, 2000 to January 22, 2010, are modeled as a cointegrated system in Vector Autoregressive analysis. Variance decompositions and impulse responses are also estimated. Our empirical results support unit root in all variables (except Saudi Arabia and the US exchange rates that are stationary in levels and first difference). Evidence of one long-run relationship (Mexico inconclusive) in Saudi Arabia, India, China and the US is supported, while Russia exhibits two long-run relationships. The results from the long-run exclusion test suggest all three variables cannot be eliminated from cointegrating space in all countries (except Mexico), while the weak exogeneity test reveals all variables to be responsive to deviation from long-run relationships (except China). Unlike the exchange rates, stock and oil prices are nonresponsive to deviations in the long-run in China. In all countries, variance decomposition and impulse response tests confirm existence of oil prices and exchange rates influences over stock prices.
Key Words: Cointegration, exchange rates, oil prices, stock prices, VAR, VECM pairwise Granger causality, variance decompositions, impulse responses, weak exogeneity.
JEL Codes: G14, G15