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Time-Varying Relation between Oil Shocks and European Stock Market Returns

Author

Listed:
  • César Castro

    (Department of Economics, Universidad Pública de Navarra, Campus Arrosadia, E-31006 Pamplona, Spain)

  • Rebeca Jiménez-Rodríguez

    (Department of Economics, University of Salamanca, Campus Miguel de Unamuno, E-37007 Salamanca, Spain)

  • Renatas Kizys

    (Department of Banking and Finance, Southampton Business School, University of Southampton, Highfield, Southampton SO17 1BJ, UK)

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.

Suggested Citation

  • César Castro & Rebeca Jiménez-Rodríguez & Renatas Kizys, 2023. "Time-Varying Relation between Oil Shocks and European Stock Market Returns," JRFM, MDPI, vol. 16(3), pages 1-28, March.
    • Handle: RePEc:gam:jjrfmx:v:16:y:2023:i:3:p:174-:d:1088260
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    References listed on IDEAS

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    2. Castro, César & Jiménez-Rodríguez, Rebeca, 2024. "The impact of oil shocks on the stock market," Global Finance Journal, Elsevier, vol. 60(C).

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