Stock and oil price returns in international markets: Identifying short and long-run effects

This paper examines how stock returns respond to oil prices with monthly data from 1990 to 2020 for 12 major economies: 6 oil-exporting countries and 6 oil-importing countries. Combining short and long-run empirical approaches in country-by-country analyses, we first document varying effects of oil price returns in the short-term, while increases in volatility (changes in VIX or geopolitical risk) have negative effects on stock markets. Dynamic OLS (DOLS) estimators show in the long-run positive oil price effects on stock markets for oil-exporters and relatively weaker negative evidence for oil-importers. Interest rate increases have strong negative effects in the long run. Panel analyses shed further light on these results along with structural breaks. Our findings suggest complementary insights from the DOLS long-run approach: oil prices and bond yields have expected signs and volatility has mixed effects on stock markets.