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Oil shocks, policy uncertainty and stock market return

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  • Kang, Wensheng
  • Ratti, Ronald A.
Abstract
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.

Suggested Citation

  • Kang, Wensheng & Ratti, Ronald A., 2013. "Oil shocks, policy uncertainty and stock market return," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 305-318.
  • Handle: RePEc:eee:intfin:v:26:y:2013:i:c:p:305-318
    DOI: 10.1016/j.intfin.2013.07.001
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    More about this item

    Keywords

    Oil shocks; Economic policy uncertainty; Stock returns; Structural VAR;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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