Oil Prices and Stock Markets Study
Added on 2019-11-25
10 Pages2214 Words245 Views
Oil Prices and Stock Markets 1Running head: OIL PRICES AND STOCK MARKETS Oil Prices and Stock MarketsNameUniversity Professor’s Name Affiliation No.
Oil Prices and Stock Markets 2Oil Prices and Stock MarketsBackgroundOil prices and stock market are both identified as leading economic indicators. Contextually, it has been observed that oil prices have negative relation with the price increase and economic growth. Economic growth is considerably associated with trading. In stock market, public listed companies are able to trade in a systematic manner. According to the past scenarios, rises of oil prices have coincided with equity market, higher inflation, government bond yield and economic recessions. Based on the fluctuation of oil prices and instable economiccondition, it can be highlighted that the movements of oil price and stock market both have a minimal correlation (Ready, 2016). AimThe aim of the research focuses on highlighting the potential effects of frequent changes in petroleum price over the past years along with corporate cash flows and earnings, which consequently have an impact on stock price. ObjectivesTo investigate the impact of volatility spillovers To discuss the bidirectional impacts on petroleum prices and stock sector indices To analyze the potential impacts of petroleum price on economy and stock price in North America, Western Europe and OPEC
Oil Prices and Stock Markets 3Literature Review Oil Price is one of the most prominent driving forces of world economy. In the last few decades, the energy dependency of the entire world has significantly changed. According to the changing scenario, the world has witnessed a stable growth with respect to energy resources, especially in petroleum. Considering the present market scenarios, it can be evaluated that petroleum along with different products are in high demand for the different varied world governments along with the stock markets (Husain, Arezki, Breuer, Haksar, Helbling, Medas..., & Sommer, 2015; Ramos & Veiga, 2014). Petroleum prices have been more volatile as compared to the other commodities. Difiglio (2014), analyzed 40 years of data related with oil price stocks and economic growth, thus revealed that weak economic growth is almost preceded by oil price stock. It is also observed that price-inelastic demand and supply of oil price shocks and reduction of economic growth are related with each other (Difiglio, 2014). In the context of relatedness of different factors of stock market, economies and oil price, Xiong & Han (2015) presented that there is a potential “linkage between exchange rates and stock return series in terms of the conditional secondary moments of relevant distributions, which is also known as volatility spillovers” (p. 8). It is a significant factor in stock market and economy stability, which was critically portrayed from the research findings of Natarajan, Singh & Priya (2014). Natarajan et al. (2014), depicted that the volatility spillovers can identify two different angles for stock market operations and economies. It can be used to emphasize casual relationship within the current volatility and previous volatility shocks of a specific market. On the other hand, cross volatility spillovers indicates a one way relationship between current volatility of a market and past volatility of the other market (Natarajan et al., 2014).
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