Time-varying effect of oil market shocks on the stock market

AbstractA mixture innovation time-varying parameter VAR model is used to examine the impact of structural oil price shocks on U.S. stock market return. Time variation is evident in both the coefficients and the variance–covariance matrix. The standard deviations of the demand side structural shocks reached forty year peaks during the global financial crisis and have remained high since. In the real stock return equation the coefficient of global real economic activity has declined since the late 1990s and that of oil-market specific demand oil shock has been lower since the early 1990s than before. The structural oil shocks account for 25.7% of the long-run variation in real stock returns overall, with substantial change in levels and sources of contribution over time. The contribution of shocks to global real economic activity to real stock return variation rose sharply to 22% in 2009 (and remains 17% over 2009–2012). The contribution of oil-market specific demand price shocks rose unevenly from 5% in the mid-1970s to about 15% in 2007, with a subsequent decline. The contribution of oil supply shocks has trended downward from 17% to 5% over 1973–2012

Structural oil price shocks and policy uncertainty

Increases in the real price of oil not explained by changes in global oil production or by global real demand for commodities are associated with significant increases in economic policy uncertainty. Oil-market specific demand shocks account for 30% of conditional variation in economic policy uncertainty and 21.5% of conditional variation in CPI forecast interquartile range after 24 months. Positive shocks due to global real aggregate demand for commodities significantly reduce economic policy uncertainty. Structural oil price shocks appear to have long-term consequences for economic policy uncertainty, and to the extent that the latter has impact on real activity the policy connection provides an additional channel by which oil price shocks have influence on the economy. As a robustness check, structural oil price shocks are significantly associated with economic policy uncertainty in Europe and energy-exporting Canada

Structural oil price shocks and policy uncertainty

Increases in the real price of oil not explained by changes in global oil production or by global real demand for commodities are associated with significant increases in economic policy uncertainty. Oil-market specific demand shocks account for 30% of conditional variation in economic policy uncertainty and 21.5% of conditional variation in CPI forecast interquartile range after 24 months. Positive shocks due to global real aggregate demand for commodities significantly reduce economic policy uncertainty. Structural oil price shocks appear to have long-term consequences for economic policy uncertainty, and to the extent that the latter has impact on real activity the policy connection provides an additional channel by which oil price shocks have influence on the economy. As a robustness check, structural oil price shocks are significantly associated with economic policy uncertainty in Europe and energy-exporting Canada

Oil shocks, policy uncertainty and stock market return

Oil price shocks and economic policy uncertainty are interrelated and influence stock market return. For the U.S. an unanticipated increase in policy uncertainty has a significant negative effect on real stock returns. A positive oil-market specific demand shock (indicating greater concern about future oil supplies) significantly raises economic policy uncertainty and reduces real stock returns. The direct effects of oil shocks on real stock returns are amplified by endogenous policy uncertainty responses. Economic policy uncertainty and oil-market specific demand shock account for 19% and 12% of the long-run variability in real stock returns, respectively. As a robustness check, (domestic) economic policy uncertainty is shown to also significantly influence real stock returns in Europe and in energy-exporting Canada

Global Commodity Prices and Global Stock Volatility Shocks

This paper investigates the time-varying dynamics of global stock volatility, commodity prices, and domestic output and consumer prices. The main empirical findings of this paper are: (i) stock volatility and commodity price shocks impact each other and the economy in a gradual and endogenous adjustment process; (ii) the impact of a commodity price shock on global stock volatility is far greater during the global financial crisis than at other times; (iii) the effects of global stock volatility on the US output are amplified by the endogenous commodity price responses; (iv) in the long run, shocks to commodity prices (stock market volatility) account for 11.9% (6.6%) and 25.1% (11.6%) of the variation in US output and consumer prices; (v) the effects of global stock volatility shocks on the economy are heterogeneous across nations and relatively larger in the developed countries; (vi) developing/small economies are relatively more vulnerable upon commodity price shocks

Impact of Global Uncertainty on the Global Economy and Large Developed and Developing Economies

Global uncertainty shocks are associated with a sharp decline in global inflation, growth and interest rate. From 1981 to 2014, global financial uncertainty forecasts 18.26% and 14.95% of the variation in global growth and global inflation, respectively. Global uncertainty shocks exhibit more protracted, statistically significant and substantial effects on the global growth, inflation and interest rate than U.S. uncertainty shocks. U.S. uncertainty lags global uncertainty by one month. When controlling for domestic uncertainty, the decline in output following a rise in global uncertainty is statistically significant in each country, with the exception of the decline for China. The effects for the U.S. and China are also relatively small. For most economies, a positive shock to global uncertainty has a depressing effect on prices and official interest rates – exceptions are Brazil, Mexico and Russia, which represent economies with large capital outflows during financial crises. Decomposition of global uncertainty shocks shows that global financial uncertainty shocks are more important than non-financial shocks

Global Commodity Prices and Global Stock Volatility Shocks

This paper investigates the time-varying dynamics of global stock volatility, commodity prices, and domestic output and consumer prices. The main empirical findings of this paper are: (i) stock volatility and commodity price shocks impact each other and the economy in a gradual and endogenous adjustment process; (ii) the impact of a commodity price shock on global stock volatility is far greater during the global financial crisis than at other times; (iii) the effects of global stock volatility on the US output are amplified by the endogenous commodity price responses; (iv) in the long run, shocks to commodity prices (stock market volatility) account for 11.9% (6.6%) and 25.1% (11.6%) of the variation in US output and consumer prices; (v) the effects of global stock volatility shocks on the economy are heterogeneous across nations and relatively larger in the developed countries; (vi) developing/small economies are relatively more vulnerable upon commodity price shocks

Impact of Global Uncertainty on the Global Economy and Large Developed and Developing Economies

Global uncertainty shocks are associated with a sharp decline in global inflation, growth and interest rate. From 1981 to 2014, global financial uncertainty forecasts 18.26% and 14.95% of the variation in global growth and global inflation, respectively. Global uncertainty shocks exhibit more protracted, statistically significant and substantial effects on the global growth, inflation and interest rate than U.S. uncertainty shocks. U.S. uncertainty lags global uncertainty by one month. When controlling for domestic uncertainty, the decline in output following a rise in global uncertainty is statistically significant in each country, with the exception of the decline for China. The effects for the U.S. and China are also relatively small. For most economies, a positive shock to global uncertainty has a depressing effect on prices and official interest rates – exceptions are Brazil, Mexico and Russia, which represent economies with large capital outflows during financial crises. Decomposition of global uncertainty shocks shows that global financial uncertainty shocks are more important than non-financial shocks

Economic Policy Uncertainty and Firm-Level Investment

This paper examines the effect of economic policy uncertainty and its components on firm-level investment. It is found that economic policy uncertainty in interaction with firm-level uncertainty depresses firms’ investment decisions. When firms are in doubt about costs of doing business due to possible changes in regulation, cost of health care and taxes, they become more guarded with investment plans. The effect of economic policy uncertainty on firm-level investment is greater for firms with higher firm-level uncertainty and during a recession. News-based policy shock has a significantly negative long-term effect on firms’ investment. Federal expenditure forecast interquartile range shock has a significant negative effect in the short- and long-run. Policy uncertainty does not seem to influence the investment decisions of the very largest firms (about 20% of listed firms)