Academic journal article The European Journal of Comparative Economics

Oil Price Shocks and Stock Markets in BRICs1

Academic journal article The European Journal of Comparative Economics

Oil Price Shocks and Stock Markets in BRICs1

Article excerpt


This paper examines the impact of oil prices on real stock returns for Brazil, China, India and Russia over 1999:1-2009:9 using VAR models. The results suggest that whereas real stock returns positively respond to some of the oil price indicators with statistical significance for China, India and Russia, those of Brazil do not show any significant responses. In addition, statistically significant asymmetric effects of oil price increases and decreases are observed in India. The analysis of variance decomposition shows that the contribution of oil price shocks to volatility in real stock returns is relatively large and statistically significant for China and Russia.

JEL classification: G12; O57; Q43

Keywords: Oil price shocks; Real stock returns; BRICs

(ProQuest: ... denotes formulae omitted.)

1. Introduction

The year 1998 witnessed a serious decrease of crude oil prices, and futures prices of New York Mercantile Exchange light sweet crude oil fell to about USD10 per barrel. Oil prices, however, began to increase from the beginning of 1999 and their rise accelerated after 2003, hitting a record high of USD145 per barrel in July 2008. Because of the global financial turmoil in late 2008, oil prices plummeted to USD34 per barrel in February 2009, which have recently started to rise again. This situation has reinvigorated the debate on the effect of oil prices on the economy.

Many studies have examined the influence of oil prices on the macroeconomy, stimulated especially by dramatic crude oil price increases because of unstable economic and political situations in the Middle East. Rasche and Tatom (1981) examined the impact of sharp increases in the price of energy on output in the U.S., Canada, France, Germany, Japan, and the U.K. Bruno and Sachs (1982) reported on relations between input price shocks and economic deceleration in the U.K. Darby (1982) conducted tests of significance in real income equations of oil-price variables for the U.S., the U.K., Canada, France, Germany, Italy, Japan, and the Netherlands. Hamilton (1983) analyzed the influence of the oil price increase on the U.S. output. Burbidge and Harrison (1984) discussed the impact of oil price increases on the price level and industrial output in the U.S., Japan, Germany, the U.K. and Canada. Gisser and Goodwin (1986) reported on relations between oil price increases and macroeconomic indicators of the U.S.

While crude oil prices were over USD 30 per barrel at the beginning of the 1980s, they plunged to about USD 15 in 1986. Mork (1989) reported on the relationship between oil prices and GNP in the U.S. data, taking into account the large oil price decrease in 1986. He indicated that although Hamilton (1983) demonstrated a strong correlation between oil price increases and gross national product growth in U.S. data, the question of whether the correlation persists in periods of price decline remained unanswered. The empirical results of Mork (1989) suggest that the impact of the oil price increase and decreases on the U.S. output was asymmetric.

Recent studies regarding the analysis of the influence of oil price shocks on the macroeconomy include Brown and Yücel (2002), Jimenez-Rodriguez and Sanchez (2005), Cunado and Perez de Garcia (2005), Cologni and Manera (2008), and Kilian (2008). Brown and Yücel (2002) presented a survey of the theory and evidence on the relationship between economic activity and oil prices. Jimenez- Rodriguez and Sanchez (2005) revealed that the effects of an increase in oil prices on real GDP growth were different from those of an oil price decrease, using data of G-7 countries, Norway and the Euro area as a whole. Cunado and Perez de Garcia (2005) indicated that oil prices have a significant effect on economic activity and price indices in six Asian countries, and found evidence of asymmetries in the oil prices-macroeconomy relationship for some countries. Cologni and Manera (2008) analyzed G-7 countries and suggested that for all countries except Japan and the U. …

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