Oil shocks and equity returns during bull and bear markets: The case of oil importing and exporting nations

Abstract

This paper examines the impact of oil price shocks on global equities. The focus is on the heterogeneity of responses to stocks depending on three characteristics: the type of the shock; whether the country is an oil importer/exporter; the bull/bear state of the stock market. We utilise the Kilian (2009) structural VAR to distil the oil price shocks and regress stock returns on these oil shocks using a quantile regression. In addition to oil price shocks, we consider the role of both economic policy uncertainty and stock market volatility. The results reveal that equity markets in oil-importing economies do not exhibit specific patterns in response to oil shocks, whereas those in oil-exporting economies are affected by precautionary oil demand shocks. Across these markets, precautionary demand shocks have a positive effect on stock markets, although for the GCC nations it predominantly impacts only during bear markets.