Oil price volatility and stock returns in the G7 economies

• Published in: Energy economics Vol. 54; pp. 417 - 430
• Main Authors: Diaz, Elena Maria, Molero, Juan Carlos, Perez de Gracia, Fernando
• Format: Journal Article
• Language: English
• Published: Kidlington Elsevier B.V 01-02-2016; Elsevier Science Ltd
• Subjects: Autoregressive models; Autoregressive processes; Crude oil; Crude oil prices; Econometrics; Economic conditions; Economic models; Economics; Energy economics; G7 economies; Industrialized nations; Interest rates; Markets; Mathematical analysis; Oil; Oil price volatility; Petroleum; Prices; Rates of return; Raw materials; Return on investment; Securities markets; Specifications; Stock exchanges; Stock returns; Studies; Vector autoregressive (VAR) model; Volatility; Canada; United Kingdom > UK; United States > US; Japan; Italy; France; Germany; ANE, France; ANW, Canada; MED, Italy; British Isles; INW, Japan; Vector autoregressive (VAR) model; Q43; Oil price volatility; G12; Stock returns; G7 economies; C40
• ISSN: 0140-9883; 1873-6181
• DOI: 10.1016/j.eneco.2016.01.002

This study examines the relationship between oil price volatility and stock returns in the G7 economies (Canada, France, Germany, Italy, Japan, the UK and the US) using monthly data for the period 1970 to 2014. In order to measure oil volatility we consider alternative specifications for oil prices (world, nominal and real prices). We estimate a vector autoregressive model with the following variables: interest rates, economic activity, stock returns and oil price volatility taking into account the structural break in the year 1986. We find a negative response of G7 stock markets to an increase in oil price volatility. Results also indicate that world oil price volatility is generally more significant for stock markets than the national oil price volatility.
•This study examines the relationship between oil price volatility and stock returns in the G7 economies.•We use alternative specifications for oil price volatility.•The paper takes into account the structural break in 1986 previously detected in the empirical literature.•We find a negative response of G7 stock markets to an increase in oil price volatility.•We also find that indicate that world oil price volatility is generally more significant for stock markets than the national oil price volatility.