Oil prices: the performance and volatility of oil stocks a cross country analysis

Abstract

The concern about crude oil and gasoline prices accentuates the link between energy and the economy. The sensitivity of stock prices to oil prices is of continuing interest, particularly when oil prices are high. Changes in crude oil prices affect national economies at large and impact certain sectors of these economies more than the others. The most affected sectors include the oil-related industries (oil exploration, production, refining, etc.), the highly oil sensitive transportation industries (airlines, trucking, railroads, etc.) and the highly oil intensive manufacturing industries (aluminum, steel, polymer, etc.). It was noted from the literatures that the studies relating the oil price and the stock prices of the oil companies are very few in number and those which do are concentrated only to US. The objective of this paper is to examine the effects of oil prices on the oil stocks in three different markets (US, India ad UK) using daily data; the dynamic interaction between oil prices and stock prices is investigated in the presence of economic variables like interest rates and industrial productions. This paper will also concentrate on the effects of volatility of crude oil prices on the oil stocks using daily data. The empirical investigation employs unit root tests, cointegration tests, variance auto regression, error-correction models with variance decomposition and impulse response, and ARCH/GARCH models. The results suggest that there exists significant short run and long run relationship between oil price and the oil stocks including the effect of the other variables such as interest rate and the stock index. The oil price volatility transmission has a persistent effect on the volatility of the stocks of the oil companies in all the countries that were studied.