Oil price changes and stock returns: Fresh evidence from oil exporting and oil importing countries

Abstract

The study examines the vital connection between stock returns and oil price changes for oil exporting/importing countries separately. We present evidence employing granger causality, impulse response and error variance decomposition based on panel vector autoregression. The results of panel granger causality suggested that after oil price crash owing to covid-19 pandemic, the interdependence between oil and stock price changes increased. Similar results were revealed by impulse response graphs and forecast error variance decomposition. Specifically, in the period marked by the rapid outbreak of the covid-19 pandemic, causality from oil to stocks increased. Although we found that both oil exporting and oil importing countries were affected in a similar way, oil price changes had a larger impact on oil exporting countries. The findings of the present study have implications for investors and fund managers. By incorporating crude oil price in the prediction models, the accuracy of stock returns forecast can be improved.

Keywords:

• Covid-19
• panel granger causality
• oil price
• panel vector autoregression
• stock returns

PUBLIC INTEREST STATEMENT

Oil is a major input for various industries and therefore oil prices influence almost all the sectors of the economy. Since stock markets reflect economic health, oil–stock relations are of importance for all–from general investors to policymakers. In this study, we provide evidence about oil–stock relations for oil-importing and oil-exporting countries before and after the announcement of Covid-19 as pandemic. The study finds that after WHO declared Covid-19 a pandemic, the oil–stock relations changed. In the post-declaration period, the interdependence between oil price changes and stock returns increased. It implies that after covid-19 became pandemic, changes in stock prices became more sensitive to oil price changes and vice versa. In addition, post-pandemic announcement the impacts of shocks in oil/stock prices have larger impacts on one another and such impacts persist for a greater number of days. This suggests that stock price forecasts can be improved by considering the likely changes in oil prices.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

The authors received no direct funding from any source for this research.

Notes on contributors

Hana Bawazir

Dr. Mustafa Raza Rabbani holds a Ph.D. in Banking and Financial Services from the prestigious Jamia Millia Islamia, University, New Delhi, India. Dr. Rabbani is a passionate researcher and in the last 2 years he has published more than 30 peer-reviewed research papers in the international journal of repute published by Emerald, Elsevier, Springer, Indesrscience, and indexed in Scopus, Web of Science (WoS) and ABDC listed, etc. He is serving as an Assistant Professor at the Department of Economics and Finance, University of Bahrain. His work has been published in a variety of international journals including Energy Economics, Research in International Business and Finance (RIBAF), Journal of Islamic and Middle eastern Finance and Management, Journal of Islamic Accounting and Business Research, Heliyon Business and Economics, Environmental Science and Pollution Research, Economic Research etc.