The Dynamics of Oil and Stock Prices Comovements

Abstract

The dynamic relationships between crude oil prices, oil sector stock price indices and stock market price indices is examined and evidence of cointegration between these variables is found. A vector error-correction (VEC) model reveals that the stock prices of companies in the integrated oil and gas sector have a long-run negative relationship with oil prices while those in the oil and gas exploration and production sector have a long-run positive relationship with oil prices. Both indices have a long-run relationship with mid- and small-capitalization stock prices. However, following shocks to oil sector indices, oil prices tends to restore the long-term equilibrium. These findings should be useful to investors in their attempts at appropriately structure their overall portfolios.