The Oil Price Shocks and their Effect on the Stock Market Returns: A Structural VAR Model

Hammami Algia, Bouri Abdelfatt

Abstract

This study investigates the impact of structural shocks that characterize the endogenous character of oil price change on the stock market returns in the emerging and developed countries over the 1998 T1–2014 T4 periods. For this reason, we use three different structural shock variables, such as the aggregate demand, the oil-supply, the oil-demand shocks and an exogenous shock arising from changes in the financial market conditions. By using Structural VAR model, we conclude that the effect of oil price changes driven by the financial shocks leads to a decline of the stock prices of all the developed countries but only for one emerging ones (Brazil). Second, the oil price shocks are bad news for the stock markets in the developed countries where the high real oil price is driven by the oil-specific demand shock. Third, we find that the supply shock plays a less important role in changes of the stock returns of both the emerging and developed countries. Finally, we find that the speculative demand and financial shocks contribute to most of the changes in the stock market return in the developed countries more than in the emerging ones.