Preview

Impact of Oil Price Shock and Its Effects on Stock Returns in Nigeria.

Good Essays
Open Document
Open Document
12005 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
Impact of Oil Price Shock and Its Effects on Stock Returns in Nigeria.
CHAPTER ONE
1.1 BACKGROUND OF THE STUDY
Oil price shocks poses a great challenge to policymakers and economist across countries, in terms of the increasing spate of fluctuations in oil prices, following the two oil price shocks in 1973 and 1979, which prompted a decline in the economic activities of major exporting countries. As a result several attentions have been made to study the relationship between oil price shocks, stock returns and other macroeconomic variables. Sadorsky (1996) explained that high oil prices reduced output and increased inflation in 1970’s and early 1980’s falling oil prices boosted output and lowered inflation particularly, in the U.S in the mid to late 1980’s.
Oil price shocks and aggregate stock returns are important macroeconomic variable in the open economy, because high oil prices tend to show how vibrant a stock market is because it helps to attract capital inflows from foreign investors, which in turn increases the demand for its currency. On the other hand, falling oil prices allow foreign investors try sells their stocks to avoid further losses and allow their money into foreign currency allowing it to move out of the country and consequently local currency depreciates. By implication, stock prices will definitely affect exchange rate and money demand because investor’s wealth and liquidity demand could be a function of the performance of the stock market.
Researches shows that Oil prices enhance series of change in the exchange rate and in turn affect the competitiveness of firms as variations in the exchange rate affect the value of the earnings as well as the cost of funds because many companies borrow in foreign currency to finance their operation and hence its stock price. Therefore an appreciation of the local currency, for example, makes exporting goods unattractive and leads to a decrease in foreign demand and hence revenue for the firms and its values would fall which definitely affect stock price and return.



References: Adebiyi, M.A; Adenuga, O.A; Abeng, M.O and Omanukue, P.N (2008) “Oil price shocks, Exchange rate and Stock market Behaviour”. Empirical evidence from Nigeria. Abdelaziz, M: G Aleisa, E.A: and S. Dibooglu (2002) “Sources of Real Exchange Rate Movements in Saudi Arabia” Journal of Economics and Finance Volume 26, Number 1,pg 101-110. Ayadi, O.F,(2005). ‘Oil Price Flunctuations and the Nigerian Economy’ OPEC Review: 199-217. Ashar, T.A; G. Arabian, and R. Zomorrodian, (2008) “Oil Price Shocks and the U.S Stock Market Paper prepared for the IABR &TLC Conference Proceedings, San Juan, Pueto Rico,USA. Basher , S.A and P,(2006). “Oil price risk and emerging stock markets.” Global Finance Journal,17, P:224-251. Brown, S. P., & Y¨ucel, M. K. (2002). Energy Prices and Aggregate Economic Activity: An Interpretative Survey Bernanke, B. S., Gertler, M., Watson, M., Sims, C. A., & Friedman, B. M. (1997). Systematic Monetary Policy and the Effects of Oil Price Shocks. Brookings Papers on Economic Activity, 1997 , 91-157. Bjornland H.C. (2008). “Monetary Policy and Exchange Rate Interactions in a Small Open Economy,” Scandanavian journal of economics, Blackwell Publishing, vol, 110(1), pages 197-221. Cavallo, M and T. Wu (2006) “Measuring Oil Price Shocks Using Market Based Information” Federal Reserve Bank of San Francisco Working Paper Series,WP 28. Chaudhuri, K., Daniel, B.C., 1998. Long-run equilibrium real exchange rates and oil prices. Economics Letters 58, 231-238. Cheung, Yin-Wong, Lilian (2003), “International evidence on the stock market and aggregate economic activity” Journal of Empirical Finance, 5(3) 281-296 Cheung, Y Cologni, A., & Manera, M. (2008). Oil prices, Inflation and Interest Rates in a Structural Cointegrated VAR Model for the G-7 Countries. Energy Economics, 30 , 856–888. Cong, R.G, Y.M, Wei, J.L Jiao, and Y. Fan (2008). “Relationships between oil price shocks and stock market: An empirical anaylsis from China.” Energy Policy, Vol 36 issue 9. Darby, M.R (1982) “The Price of Oil and World Inflation and Recession,”American Economic Review 72: 738-751. Driesponga, G; B Edelstein, P., & Kilian, L. (2007). The Response of Business Fixed Investment to Changes in Energy Prices: A Test of Some Hypotheses about the Transmission of Energy Price Shocks. The B.E. Journal of Macroeconomics, Article 35. Gregorio, J. D., Landerretche, O., & Neilson, C. (2007). Another Pass-Through Bites the Dust? Oil Prices and Inflation (Working Paper No Frederic s. Mishkin (1998) The Economics of Money, Banking and Financial Market. Faff, R. W., & Brailsford, T. J. (1999). Oil Price Risk and the Australian Stock Market. Journal of Energy Finance and Development, 4 , 69–87. Huang, B.N., Hwang, M.J..,Peng, H.P., (2005) The asymmetry of the impact of oil price shocks on economic activites; an application of the multivariate threshold model Lee.K., and S.Ni (2002). “On the Dynamic Effects of Oil price shocks; A study using industry level data,” journal of monetary economics 49: 823-852 Hamilton, J Hamilton, J. D. (1996). This is What Happened to the Oil Price – Macroeconomy Relationship.Journal of Monetary Economics, 38 , 215-220. Hamilton, J. D. (2003b). What is an Oil Shock? Journal of Econometrics, 113 , 363-398. Hamilton, J. D. & Herrera, A. M. (2004). Oil Shocks and Aggregate Macroeconomic Behavior: The Role of Monetary Policy Hooker, M. A. (1996b). What Happened to the Oil Price-Macroeconomy Relationship? Journal of Monetary Economics, 38 , 195-213. Hooker, M. A. (1999). Oil and the Macroeconomy Revisited (FEDS Working Paper No. Huang, B.-N., Hwang, M., & Peng, H.-P. (2005). The Asymmetry of the Impact of Oil Price Shocks on Economic Activities: An Application of the Multivariate Threshold Huang, R. D., Masulis, R. W., & Stoll, H. R. (1996). Energy Shocks and Financial Markets Hunt, B. (2006). Oil Price Shocks and the U.S. Stagflation of the 1970s: Some Insights from GEM Hunt, B., lsard, P., & Laxton, D. (2001). The Macroeconomic Effects of Higher Oil Prices (Working Paper No Iwayemi, A. and Fowowe, B. (2009) “Oil and the Macroeconomy” Empirical Evidence from Oil Exporting Countries. Jones,C.M., and G. Kaul (1996) ‘Oil and the Stock market, journal of finance 51 : 463-491 Koranchelian, T Kilian, L. (2008a). A Comparison of the Effects of Exogenous Oil Supply Shocks on Output and Inflation in the G7 Countries. Journal of the European Economic Association,6 , 78-121. Kilian, L. (2008b). The Economic Effects of Energy Price Shocks. Journal of Economic Literature, 46 , 871-909. Kilian, L. (2008c). Not All Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market Mork, K.A. (1989) “Oil and the Macroeconomy when Prices Go Up and Down; An Extension of Hamilton’s Results”, Journal of Political Economy 97; 740-744 Mork, K.A Nandha, M., & Faff, R. (2008). Does Oil Move Equity Prices? A Global View. Energy Economics, 30 , 986–997 Olomola , P.A and Adejumo A.V (2006) “ Oil Price Shocks and Macroconomic activities in Nigeria. Ozturk I. M, Feridun and H. Kalyoncu (2008) “Do Oil price affect USD/YTL. Exchange Rate: Evidence from Turkey. Papapetrou, E Park, J.W, and R.A Ratti (2007) “Oil price shocks and the Stock Markets in the U.S.and 13 European Countries” Energy Economics,30,p: 2587-2608. Pierce J.L and J.J Enzler (1974) The Effects of External Inflationary Shocks.” Brooklings Papers on Economic Activity. Sakellaris, P Sanchez, M. (2008). Oil Shocks and Endogenous Markups (Working Paper No. 860). Rodriguez, Rebecca and Marcelo Sanchez (2005), “Oil price shocks and Real GDP Growth: Empirical Evidence for some OECD Countries”. Applied Economics, 37(2):201-218. Raguindin, C.E and R.G. Reyes (2005): The Effects of Oil Price Shocks on the Philippine Economy: A VAR Approach, Working Paper, University of Philippines School of Economics. Sadorsky, P.(1999). “Oil price shocks and Stock Market Activity.” Energy Economics, volume 21, issue 5. Sadorsky, P. (2000). The Empirical Relationship Between Energy Futures Prices and Exchange Rates Sadorsky, P. (2001). Risk Factors in Stock Returns of Canadian Oil and Gas Companies. Energy Economics, 23 , 17-28. Sadorsky, P. (2002). Time-Varying Risk Premiums in Petroleum Futures Prices. Energy Economics, 24 , 539-556. Sadorsky, P. (2003). The macroeconomic determinants of technology stock price volatility. Review of Financial Economics, 12 , 191-205. Sadorsky, P. (2008). Assessing the Impact of Oil Prices on Firms of Different Sizes: Its Tough Being in the Middle Symth,D.J.(1993) “Energy prices and Aggregate production function” Energy economics. Wei, C. (2003). Energy, the Stock Market, and the Putty-Clay Investment Model. American Economic Review, 93 , 311-323.

You May Also Find These Documents Helpful

  • Better Essays

    Domestic Oil Drilling

    • 1695 Words
    • 7 Pages

    "Oil Market Report." OPEC. Organization of Petroleum Exporting Counties., 1 Jan. 2012. Web. 6 Feb. 2012. <http://www.opec.org/opec_web/static_files_project/media/downloads/publications/MOMR_January_2012.pdf>.…

    • 1695 Words
    • 7 Pages
    Better Essays
  • Good Essays

    ECON 545 Project 1

    • 730 Words
    • 3 Pages

    Crude oil prices are determined by worldwide supply and demand, which is why as countries around the world developing rapidly, the demand for and price of gas increases rapidly. Natural disasters and Political conflicts in major oil producing regions such as Saudi Arabia, Iran and Iraq can also affect the price of gas. The Organization of Petroleum Exporting Countries (OPEC) also has significant influence over the price of crude oil because its members produce over 40% of the world’s supply of oil and own more than two-thirds of the world’s estimated oil reserves.(2)…

    • 730 Words
    • 3 Pages
    Good Essays
  • Good Essays

    Eco 365 Week 1

    • 708 Words
    • 3 Pages

    The following information within this article relates that there is in fact a variable that continues to cause and affect our Oil and Gasoline pricing. These pricing effects can either the cost of oil per barrel; the higher the barrels are the higher the cost of fuel will be indicated. The other flip side to this equation is that if the demand falls off of the expected earnings we can also be affected…

    • 708 Words
    • 3 Pages
    Good Essays
  • Satisfactory Essays

    Three explanations have been suggested for the moderation in real GDP and inflation that has occurred in industrialized countries since the 1980s: good luck, better monetary policy, and structural changes in the economy. Recent research finds that better monetary policy explains most of the moderation in inflation, and good luck and the less-intensive use of oil (a structural change) have played a major role in the moderation of GDP. Good luck refers to the possibility that the remarkably benign series of economic shocks that have hit the economy in recent years has been the result of nothing other than chance. Some economists conjecture that stable oil prices have helped to produce these calm waters, because so much of industrialized countries’ output requires oil as an input to production, and most of these countries import their oil. While today’s rising oil prices may seem to spell the end of these good times, the percentage change in recent oil prices has been much less abrupt than in the…

    • 297 Words
    • 2 Pages
    Satisfactory Essays
  • Better Essays

    Eco 372 Week 5

    • 919 Words
    • 4 Pages

    Herron, J., Oil Surplus Seen if Recession Re-emerges,(August 11,2011) Retrieved on February 27, 2012, http://online.wsj.com/article/SB10001424053111903918104576499640733192116.html…

    • 919 Words
    • 4 Pages
    Better Essays
  • Better Essays

    Oil is, for a large number of products and services, fundamental to their production, be it in the manufacturing of the good itself or the energy needed to perform tasks in transportation, heating storage etc This therefore follows that oil is a major cost of production for goods and on a macro level effects Aggregate supply shifting it to the left. In indicated by the shift from AS1 to AS2 in the graph. The magnitude of the shift will be dependent on any stabilisers the economy has in place to dampen the effect of the shock such as fast acting fiscal responses, like reducing the tax on oil but it is undoubtedly true that these will not cushion the shock completely. A shift in, AS will have two important effects: an increase in inflation due to the new raised price level and an increase in unemployment. It could have been argued that in the short run, the economy would hold true to the Philips curve and so this rise in the level of inflation would decrease unemployment but this is not the case. As Oil is a cost of production, it means that producers will have higher costs and so will inevitably have to lay workers off. This will add to the unemployment level within an economy as businesses can afford few numbers of workers and will put further demand on any welfare provisions in place in the economy- in the UK economy, this would be the benefits system. However, more…

    • 1343 Words
    • 4 Pages
    Better Essays
  • Satisfactory Essays

    As a result of this embargo, the price of oil increased by 300%, causing widespread oil shortages and in some cases forcing petrol stations to close. Experts have warned that a similar crisis may be imminent, with Western countries' presence in the middle east causing friction with some of the countries who are members of OPEC. Oil prices have been increased in many areas in an attempt to reduce consumption levels and protect our natural resources. However, research has indicated that despite these measures the consumption of oil continues to increase, with an estimated 89 million barrels of oil being used globally every day. Should a crisis like this hit, the effect on the global economy will be huge - importing materials and goods has become an essential practice for larger organizations, but any increase in oil price would dramatically increase the transportation costs of importing and exporting.…

    • 518 Words
    • 2 Pages
    Satisfactory Essays
  • Good Essays

    Saudi Arabia is the largest producer of crude oil in the world. It contains a quarter of the world’s known oil reserves, and its state-run company, Aramco, is the highest valued company in the world at $781 billion. Saudi Arabia received 90% of its $230 billion export revenue from petroleum products. It requires that oil prices remain between $49 and $55 per barrel to keep the country operating. Therefore, the global oil system has impacted the development of Saudi Arabia by its regulations of oil prices. There are three main factors that I will discuss that have influenced the global oil system and consequently the development of Saudi Arabia. First is the emergence and growth in importance of OPEC countries, followed by an increase in production from non-OPEC countries. Second is the commoditization of oil and its effect on oil prices. Lastly is the power and importance of state-run oil companies, notably Saudi Arabia’s Aramco.…

    • 1735 Words
    • 7 Pages
    Good Essays
  • Powerful Essays

    Mena Essay

    • 3026 Words
    • 13 Pages

    Berenson, Alex, and Jonathan Fuerbringer, “Oil and Gas Prices Tumble, but Sticks Soar Worldwide,” New York Times, September 25, 2001…

    • 3026 Words
    • 13 Pages
    Powerful Essays
  • Good Essays

    Blance of Payment

    • 903 Words
    • 4 Pages

    High oil prices are again transforming oil-exporting economies. Economies that were declining when oil hovered in the $20s for most of the 1990s—and at risk of bankruptcy when oil dipped to $10 a barrel in 1998—are now booming. A new generation of skyscrapers is rising in the Gulf, in St. Petersburg, and in Moscow. Government reserves in oil-exporting economies are overflowing with the governments’ large cut from the oil revenues. Most oil-exporting economies now need an oil price of $40 a barrel to cover their import bill, including their bill for imported labor, but with oil trading above $90 a barrel, they still have substantial sums available to invest in the rest of the world.…

    • 903 Words
    • 4 Pages
    Good Essays
  • Good Essays

    Lessons: The Crude Art of Policy Making All over the world, the price of crude oil experiences wide price swings in times of shortage or oversupply just like other commodities. The crude oil cycle may extend over several years responding to changes in demand and supply. In this paper, we intend to discuss the dynamics and impact in the economy, and how the central banks respond to a rise in oil price. To be able to understand the dynamics of adjustment of oil price, we use the economic diagram of aggregate demand and supply given by D1 and S1 respectively in the left hand graph, where the points they intersect signify that the economy is in equilibrium. In the graph, Q1 is the output at the natural level of output and implies the price, P1. Based on the graph, the shift on aggregate supply curve to the left, to S2 is caused by the firm who imports crude Graph1. The impact of higher oil prices. oil. If the price of importing crude oil is high, then the firm’s production costs will also increase. As a result, it reduces profit so they supply fewer goods and services. This can also relate according to Blanchard, using the equation: P = Pe (1+μ) F(1- u,z) where, u = unemployment rate μ = mark up of the price over nominal wage Pe = expected price level…

    • 717 Words
    • 3 Pages
    Good Essays
  • Satisfactory Essays

    VILLAR. J & JOUTZ. F, (2006), The Relationship Between Crude Oil and Natural Gas Prices, Energy Information…

    • 7596 Words
    • 31 Pages
    Satisfactory Essays
  • Powerful Essays

    Keywords: Cointegration, Granger Causality, Oil price shock, Exchange Rate Volatility, VECM JEC Classification Codes: F40; F41, F43…

    • 7038 Words
    • 29 Pages
    Powerful Essays
  • Good Essays

    The United States supply and demand for oil has affected all of us in some way. Oil prices have affected us in many areas such as: transportation, industrial, electricity, residential and commercial. Many families are feeling the effects of high oil prices at the pump, with the average gasoline at $2.71 per gallon. This oil price bubble of up and down helps us a class to see the significance of understanding supply and demand.…

    • 584 Words
    • 3 Pages
    Good Essays
  • Powerful Essays

    Trench, C.J. (2009). Oil market basics: a primer. Retrieved July 24, 2009 from the Energy Information Administration, U.S. Department of Energy Web site: www.eia.doe.gov/pub/oil_gas/petroleum/analysis_publications/oil_market_basics/…

    • 1754 Words
    • 8 Pages
    Powerful Essays

Related Topics