Oil Prices and Stock Markets Study

Added on - 25 Nov 2019

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Oil Prices and Stock Markets1Running head: OIL PRICES AND STOCK MARKETSOil Prices and Stock MarketsNameUniversityProfessor’s NameAffiliation No.
Oil Prices and Stock Markets2Oil 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 increaseand economic growth. Economic growth is considerably associated with trading. In stockmarket, public listed companies are able to trade in a systematic manner. According to the pastscenarios, rises of oil prices have coincided with equity market, higher inflation, governmentbond 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 aminimal correlation (Ready, 2016).AimThe aim of the research focuses on highlighting the potential effects of frequent changes inpetroleum price over the past years along with corporate cash flows and earnings, whichconsequently have an impact on stock price.ObjectivesTo investigate the impact of volatility spilloversTo discuss the bidirectional impacts on petroleum prices and stock sector indicesTo analyze the potential impacts of petroleum price on economy and stock price in NorthAmerica, Western Europe and OPEC
Oil Prices and Stock Markets3Literature ReviewOil Price is one of the most prominent driving forces of world economy. In the last fewdecades, the energy dependency of the entire world has significantly changed. According to thechanging 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 thatpetroleum along with different products are in high demand for the different varied worldgovernments along with the stock markets (Husain, Arezki, Breuer, Haksar, Helbling, Medas...,& Sommer, 2015; Ramos & Veiga, 2014). Petroleum prices have been more volatile ascompared to the other commodities. Difiglio (2014), analyzed 40 years of data related with oilprice stocks and economic growth, thus revealed that weak economic growth is almost precededby oil price stock. It is also observed that price-inelastic demand and supply of oil price shocksand 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 andstock 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 andeconomy 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 twodifferent angles for stock market operations and economies. It can be used to emphasize casualrelationship within the current volatility and previous volatility shocks of a specific market. Onthe other hand, cross volatility spillovers indicates a one way relationship between currentvolatility of a market and past volatility of the other market (Natarajan et al., 2014).
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