How Do Different Oil Price Shocks Affect the Relationship Between Oil and Stock Markets?

This paper investigates the effect of different types of oil price shocks on the time varying correlation between oil and stock markets, and compares this effect in the oil importer and oil exporter countries for the period of 1996:1- 2014:2. To this end, the paper uses SVAR, cDCC and MS models which introduced by Kilian (2009), Aielli (2011) and Hamilton (1989), respectively. These models help us to apply nonlinear and dynamic linkages in estimating relationship between oil price shocks and the correlations between oil and stock markets. Our results show that correlation between oil and stock markets does not depend on oil price shocks origins and being oil importer or oil exporter countries. We also conclude that the relationship between oil price returns and stock index returns are time varying for selected countries. Considering the results, it is obvious that international investors could not hedge oil price shocks’ risks in their global portfolio by diversification and managing their portfolio of oil importer and oil exporter stock markets. Hence, it is suggested they use other substituted policies and investing strategies, like future contracts.