The effect of oil prices on stock prices: fresh evidence from asymmetric causality tests

Abdulnasser Hatemi-J, Abdulrahman Al Shayeb, Eduardo Roca

    Research output: Contribution to journalArticlepeer-review

    47 Citations (Scopus)

    Abstract

    This article investigates the causal impact of oil prices on stock prices in each G7 market as well as in the world market. An asymmetric causality test developed by Hatemi-J is used for this purpose. Since the underlying data appears to be non-normal with time-varying volatility, we use bootstrap simulations with leverage adjustments in order to produce more reliable critical values than the asymptotic ones. Based on symmetric causality tests, we find no causal effect of oil prices on the stock prices of the world market or any of the G7 countries. However, when we apply an asymmetric causality test, we find that increasing oil prices cause stock prices to rise in the world, the U.S. and Japan while decreasing oil prices cause stock prices to fall in Germany. This may imply that the world, the U.S. and Japanese stock markets consider increases in oil prices as an indicator of good news as this may mean that there is an increase in oil demand due to an expected growth in the economy while the German stock market treats decreasing oil prices as a signal of an expected contraction in the economy.

    Original languageEnglish
    Pages (from-to)1584-1592
    Number of pages9
    JournalApplied Economics
    Volume49
    Issue number16
    DOIs
    Publication statusPublished - Apr 3 2017

    Keywords

    • G7
    • Oil prices
    • asymmetric causality
    • stock markets

    ASJC Scopus subject areas

    • Economics and Econometrics

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