Oil Price Shocks And Stock Market Behaviour:theory And Evidence

Authors: Kabir Ladan
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There are considerable literature that examined the oil price shocks and stockmarket behaviour. This paper reviewed the literature on the relationship between the oil prices and stock return. Fluctuations of oil price in the international market have implications on the stock market return. The theoretical transmission mechanisms between the two variables are identified to include stock valuation, monetary, output, fiscal and uncertainty channels. It is expected that raising oil price lead to lower stock return in oil importing economies. By contrast in oil exporting economies the effects are expected to be positive for the stock market return. Some empirical findings are inconsistent with the theoretical expectations. The results from both oil importing andoil exporting countries have no general consensus on the nature of the relationship between oil price and stock market return. Thus there is the need for a new approach on the study of the relationship between the two variables.