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AN EMPIRICAL INVESTIGATION INTO THE RELATION OF OIL TO STOCK MARKET PRICES

Emmanuel Anoruo

Muhammad Mustafa

ABSTRACT

This paper investigates the relationship between oil and stock market returns for the United States using cointegration techniques and the modified VECM. The results reveal that the oil and stock market returns are cointegrated. The results from the modified VECM suggest that causality runs from stock market to oil market but not vice versa. Taken together, the results provide evidence in support of the notion that the two markets are integrated rather than segmented. The finding of integration between oil price and stock market returns implies that investors cannot benefit from diversification by holding assets in oil and stock markets simultaneously.

Keywords: Cointegration, Oil Price, Stock markets, VECM,

JEL Classification: C32, E32