Abstract:
This study investigates the dynamic linkages between oil prices and stock markets, also known as the oil price-stock price nexus. Within the framework of a VAR (vector autoregression) we examine dynamic interactions between daily Brent spot prices and several Lebanese stock prices. As expected, we find evidence of oil prices Granger causing stock prices, but no evidence of the opposite relationship. To better understand how shocks in the oil market are transmitted to the stock market, the orthogonalized impulse response function is examined. The behavior of all stocks examined is very similar; they all respond positively to a shock in crude oil prices on the same day and the day after the shock, with the impact of the shock disappearing thereafter. As for the variance decomposition analysis, it shows that the forecast errors of the stocks are largely attributable to their own innovations and the percentages do not change much with time. Only around 1percent is attributable to oil shocks, increasing to around 3percent after a few days and remaining at that level. Thus, our main conclusion is that the estimated level of the impact of an oil price shock on the Lebanese stock market is positive but marginal. © 2013 Elsevier Ltd.
