Crude oil and stock markets: Stability, instability, and bubbles

We analyze the long-run relationship between the world price of crude oil and international stock markets over 1971:1–2008:3 using a cointegrated vector error correction model with additional regressors. Allowing for endogenously identified breaks in the cointegrating and error correction matrices,...

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Bibliographic Details
Published in:Energy economics 2009-07, Vol.31 (4), p.559-568
Main Authors: Miller, J. Isaac, Ratti, Ronald A.
Format: Article
Language:English
Subjects:
Applied sciences
Cointegrated VECM
Cointegration analysis
Crude oil
Crude oil prices
Crude oil Stock market prices Cointegrated VECM Structural stability Stock market bubble Oil price bubble
Econometric models
Economic data
Economic models
Energy
Energy economics
Error correction & detection
Exact sciences and technology
Financial speculation
Fossil fuels and derived products
General, economic and professional studies
Industrialized nations
Methodology. Modelling
Oil
Oil market
Oil price
Oil price bubble
Regression analysis
Securities markets
Stock exchange
Stock exchanges
Stock market bubble
Stock market prices
Structural stability
Studies
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Summary:We analyze the long-run relationship between the world price of crude oil and international stock markets over 1971:1–2008:3 using a cointegrated vector error correction model with additional regressors. Allowing for endogenously identified breaks in the cointegrating and error correction matrices, we find evidence for breaks after 1980:5, 1988:1, and 1999:9. There is a clear long-run relationship between these series for six OECD countries for 1971:1–1980.5 and 1988:2–1999.9, suggesting that stock market indices respond negatively to increases in the oil price in the long run. During 1980.6–1988.1, we find relationships that are not statistically significantly different from either zero or from the relationships of the previous period. The expected negative long-run relationship appears to disintegrate after 1999.9. This finding supports a conjecture of change in the relationship between real oil price and real stock prices in the last decade compared to earlier years, which may suggest the presence of several stock market bubbles and/or oil price bubbles since the turn of the century.
ISSN:0140-9883
1873-6181
DOI:10.1016/j.eneco.2009.01.009