Oil Price and Stock Market Interaction in the USA

ABSTRACT: This thesis focuses on analyzing empirical relationship between oil prices and stock market movements in the case of United States by employing an annual data from 1970 to 2010. Dow Jones industrial stock price index (industrial weighted average) has been selected to proxy for stock markets while real income and real industrial value added are added to analyses as control variables as advised in the literature. Results of this thesis show that oil prices do have significant impact on stock markets both in economic long and short terms; these impacts are negative as expected. Stock markets approach to their long term equilibrium path by 50.92% speed of adjustment every year significantly through the channels of oil prices and aggregate economic activity. Final finding this research study is that there also exists long term unidirectional causality that runs from oil prices and economic activity to stock prices in United States. This reveals that a change in oil prices will precede changes in stock market movements. Keywords: Stock Price, GDP, Industrial Production, USA. ……………………………………………………………………………………………………………………………………………………………………………………………………………………