The Effect of Oil-Price Shocks on Asset Markets: Evidence from Oil Inventory News
By Ron Alquist, Ph.D., Vice President, AQR Capital Management; Reinhard Ellwanger, Ph.D., Senior Economist, Bank of Canada and Jianjian Jin, Ph.D., Senior Analyst, Investment Strategy and Risk Department, British Columbia Investment Management Corporation, Canada
This paper quantifies the reaction of U.S. equity, bond futures, and foreign exchange returns to oil-price shocks. Using instrumental variables methods based on U.S. oil-inventory announcements, the authors find that equity prices decrease in response to higher oil prices before the 2007/08 crisis but increase after it. The U.S. dollar tends to depreciate against a basket of currencies in response to positive oil-price shocks, and this effect is larger after the financial crisis. By contrast, oil-price shocks have a modest effect on bond futures returns. The authors argue that changes in risk premia help to explain the time-varying effect of oil-price shocks on U.S. equity returns.
Read Article