Uncovering the time-varying nature of causality between oil prices and stock market returns : a multi-country study

Gómez-González, José Eduardo; Hirs-Garzón, Jorge

Uncovering the time-varying nature of causality between oil prices and stock market returns : a multi-country study

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Borradores de Economía; No. 1009

Date published

2017-08-10

Date

2017-08-10

Authors

Gómez-González, José Eduardo
Hirs-Garzón, Jorge

Document language

eng

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Las opiniones contenidas en el presente documento son responsabilidad exclusiva de los autores y no comprometen al Banco de la República ni a su Junta Directiva.

The opinions contained in this document are the sole responsibility of the author and do not commit Banco de la República or its Board of Directors.

Abstract

We study the relation between oil prices and stock market returns for a set of six countries, including important oil consumers and demanders. We study interconnectedness between oil and stock markets and characterize the dynamics of transmission and reception between them. We test for Granger causality between markets dynamically, endogenously identifying periods for which oil prices have responded to innovations in financial markets. Our results on connectedness show that the direction of transmission is mainly from stock markets to crude petroleum prices. Additionally, connectedness increased importantly around the global financial crisis, and reports high levels until 2014. Regarding causality, we find evidence of bidirectional relations between stock market returns and crude petroleum prices. Causality is stronger during times of financial volatility as well. Our results have important implications both for investors and policy makers.