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Time-varying relation between oil shocks and European stock market returns

Time-varying relation between oil shocks and European stock market returns
Time-varying relation between oil shocks and European stock market returns

This paper considers a time-varying parameter vector autoregression model to analyze the varying impact of three types of structural oil shocks (the supply-side shock, the aggregate demand shock, and the oil-specific demand shock) on the European stock market since the 1990s. Our findings show that the three types of oil shocks heterogeneously influence stock market returns in the euro area, and that this influence considerably changes over time during the period considered. First, an unexpected increase in oil supply appears to exert a positive but generally declining effect in the period before the Global Financial Crisis (GFC) of 2007–2009, which descends into negative values after the GFC. Second, an unanticipated increase in aggregate demand triggers a generally positive effect on stock market returns in the euro area. However, in the period from 2003 to 2005, stock market returns responded negatively, which could be attributed to the so-called growth-retarding effect. Third, an unexpected increase in oil-specific demand instigates a negative response in the pre-GFC period (considering the response 4–5 months after the shock), although this changes to a positive effect thereafter. Interestingly, irrespective of the origin of oil price fluctuations, oil price increases are associated with positive European stock market returns after the GFC. This signals a greater degree of oil market financialization.

European stock market, oil shocks, TVP-VAR model
1911-8066
Castro, César
16f4efb6-0dce-4ac7-bf3a-3380427bf46e
Jiménez-Rodríguez, Rebeca
19fcfef4-255b-45e9-8c0f-bfcc968fbc5c
Kizys, Renatas
9d3a6c5f-075a-44f9-a1de-32315b821978
Castro, César
16f4efb6-0dce-4ac7-bf3a-3380427bf46e
Jiménez-Rodríguez, Rebeca
19fcfef4-255b-45e9-8c0f-bfcc968fbc5c
Kizys, Renatas
9d3a6c5f-075a-44f9-a1de-32315b821978

Castro, César, Jiménez-Rodríguez, Rebeca and Kizys, Renatas (2023) Time-varying relation between oil shocks and European stock market returns. Journal of Risk and Financial Management, 16 (3), [174]. (doi:10.3390/jrfm16030174).

Record type: Article

Abstract

This paper considers a time-varying parameter vector autoregression model to analyze the varying impact of three types of structural oil shocks (the supply-side shock, the aggregate demand shock, and the oil-specific demand shock) on the European stock market since the 1990s. Our findings show that the three types of oil shocks heterogeneously influence stock market returns in the euro area, and that this influence considerably changes over time during the period considered. First, an unexpected increase in oil supply appears to exert a positive but generally declining effect in the period before the Global Financial Crisis (GFC) of 2007–2009, which descends into negative values after the GFC. Second, an unanticipated increase in aggregate demand triggers a generally positive effect on stock market returns in the euro area. However, in the period from 2003 to 2005, stock market returns responded negatively, which could be attributed to the so-called growth-retarding effect. Third, an unexpected increase in oil-specific demand instigates a negative response in the pre-GFC period (considering the response 4–5 months after the shock), although this changes to a positive effect thereafter. Interestingly, irrespective of the origin of oil price fluctuations, oil price increases are associated with positive European stock market returns after the GFC. This signals a greater degree of oil market financialization.

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More information

Accepted/In Press date: 1 March 2023
e-pub ahead of print date: 5 March 2023
Published date: 5 March 2023
Additional Information: Funding Information: This work was partially written while Rebeca Jiménez-Rodríguez was visiting King’s College London (whose kind hospitality is gratefully acknowledged) under the PRX18/00501 Salvador de Madariaga grant from the Spanish Ministry of Science, Innovation and Universities. This author also acknowledges support from the research grant SA049G19 (Junta de Castilla y León). Moreover, César Castro acknowledges financial support from the Ministerio de Ciencia, Innovación y Universidades (Project DGCT, No. PID2021-127119NB-100).
Keywords: European stock market, oil shocks, TVP-VAR model

Identifiers

Local EPrints ID: 476726
URI: http://eprints.soton.ac.uk/id/eprint/476726
ISSN: 1911-8066
PURE UUID: 3202d899-0ccb-42f0-8db1-4783991aa111
ORCID for Renatas Kizys: ORCID iD orcid.org/0000-0001-9104-1809

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Date deposited: 12 May 2023 16:46
Last modified: 18 Mar 2024 03:52

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Contributors

Author: César Castro
Author: Rebeca Jiménez-Rodríguez
Author: Renatas Kizys ORCID iD

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