The Conundrum of Oil Prices, Stock Returns and Exchange Rate

Abstract

This study imperially investigated the impact of oil prices and exchange rate on stock returns over the period of demand driven oil shock from 2001 to 2008 and supply driven oil shock from 2009 to 2016. To further explore the variation due to frequency of data, the study used daily, weekly and monthly data. The data was analyzed by applying Johansen Cointegration test, Vector error correction model, Granger causality test and Impulse response function. The Johansen Cointegration and vector error correction models confirm the long run relationship between oil prices and stock returns in all six samples. In short run, oil prices and exchange rate are not associated with the changes in stock returns. However, during demand driven oil price shocks, results confirm bidirectional relationship between oil prices and stock return.