OIL PRICE SHOCKS AND STOCK MARKET BOOMS IN AN OIL EXPORTING COUNTRY
| DOI | http://doi.org/10.1111/j.1467-9485.2009.00482.x |
| Date | 01 May 2009 |
| Published date | 01 May 2009 |
OIL PRICE SHOCKS AND
STOCK MARKET BOOMS IN AN
OIL EXPORTING COUNTRY
Hilde C. Bjørnland
n
Abstract
This paper analyses the effects of oil price shocks on stock returns in Norway,
an oil-exporting country, highlighting the transmission channels of oil prices
for macroeconomic behaviour. To capture the interaction between the different
variables, stock returns are incorporated into a structural VAR model. I find
that following a 10% increase in oil prices, stock returns increase by 2.5%, after
which the effect gradually dies out. The results are robust to different (linear and
non-linear) transformations of oil prices. The effects on the other variables are
more modest. However, all variables indicate that the Norwegian economy
responds to higher oil prices by increasing aggregate wealth and demand.
The results also emphasize the role of other shocks; monetary policy shocks
in particular, as important driving forces behind stock price variability in the
short term.
I Intro ductio n
According to the seminal work of Hamilton (1983), all US recessions but one
since World War II were preceded by a spike in oil prices. High oil prices
typically lead to a reduction in the supply of oil, a major input to production,
decreasing total world output of goods and services. Subsequent to Hamilton’s
work, a large body of research has suggested that oil price variations have strong
and negative consequences for oil importing countries. These results hold
independent of whether one uses alternative data and estimation procedures, see
for instance, Burbidge and Harrison (1984), Gisser and Goodwin (1986),
Cun
˜ado and Pe
´rez de Gracia (2003) and Jime
´nez-Rodrı
´guez and Sa
´nchez (2005).
More recently, research has focused on the role that asymmetric oil price shocks
have on the economy. This research has followed the observation that from the
mid-1980s, the oil price–macroeconomic relationship seemed to lose its
significance. However, by instead assuming various non-linear transformations
of oil prices, the negative link between oil price increases and economic activity
still prevails; see Hamilton (2003) for evidence and an overview of the literature.
n
Norwegian School of Management (BI) and Norges Bank.
Scottish Journal of Political Economy, Vol. 56, No. 2, May 2009
r2009 The Author
Journal compilation r2009 Scottish Economic Society. Published by Blackwell Publishing Ltd,
9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main St, Malden, MA, 02148, USA
232
The studies referred to above all concern oil importing countries. For oil
exporting countries, the mechanisms may be significantly different. In particular,
higher oil prices generate additional income and wealth to oil producers. If this
income is transmitted back to the economy, then higher oil prices would be
expected to lead to higher levels of economic activity. Yet, empirical studies have
provided no consensus on how oil price changes affect the macroeconomic
performance of oil exporting countries. For instance, while Norway has
benefited from higher oil prices for prolonged periods, countries like Canada
and the United Kingdom behave more in line with oil importing countries, with
higher oil prices leading to lower output (see Bjørnland, 1998, 2000; Jime
´nez-
Rodrı
´guez and Sa
´nchez, 2005).
In sharp contrast to the volume of studies investigating the link between
oil price shocks and macroeconomic variables, there have been relatively
few analyses on the relationship between oil price shocks and financial markets
such as the stock market, with the notable exceptions of Nandha and
Faff (2008), Sadorsky (1999), Jones and Kaul (1996) and Huang et al. (1996),
whose studies are limited to oil importing countries. With regard to oil
exporting countries, the issue has largely been ignored.
1
Yet, asset prices; and
stock prices in particular will be affected by the price of oil, through the
cash flow of oil related firms. Asset prices may then influence consumption
through a wealth channel and investments through the Tobin Qeffect and,
moreover, increase a firm’s ability to fund operations (credit channel). Hence,
asset prices may be an important transmission channel of wealth in an oil
abundant country.
In this paper, I analyse the effects of oil price shocks on financial markets in
Norway, an oil exporting country. Norway is used as a case study, since the
country has been a net oil exporter for almost 30 years. However, oil prices do
not affect asset prices in isolation, but through the perceived effect on the
macroeconomy. An analysis of the linkages between oil and financial markets
therefore requires a thorough examination of macroeconomic linkages. Given
the pattern of behaviour for the macroeconomy, the hypothesis maintained is
that oil price increases not only boost aggregate wealth and stock returns, but
overall growth. Furthermore, as most central banks, including the Central Bank
of Norway, Norges Bank, regulate monetary policy with the aim of targeting
inflation, the analysis of oil prices requires a model that allows policy makers to
respond to shocks that result in higher inflation. Implicit to the transmission
mechanism of oil price shocks is therefore a study of monetary policy responses
to curtail any effects that changes in oil prices may have on aggregate demand
and inflation.
To capture the full interaction between the different variables, I will specify a
model that allows for endogenous responses to the variables. The structural
1
El-Sharif et al. (2005) investigate the relationship between the price of crude oil and equity
values in the oil and gas sector in the United Kingdom, but do not focus on the role of equity as
a transmitters of shocks as will be done here.
OIL PRICE SHOCKS AND STOCK MARKET BOOMS 233
r2009 The Author
Journal compilation r2009 Scottish Economic Society
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