The Impact of Oil Price Shocks on Stock Returns of European Industries

Abstract: Using a VAR approach, we investigate the sensitivity of European industry returns to linear oil price changes and oil price volatility for a period from January 1995 until December 2015. We show that the response to a change in the price of oil is varying across industries and across the sample period. Splitting the data into a period before and after the beginning of the financial crisis, we find evidence that the relationship between industry returns and the oil price has changed. Before the financial crisis, most oil energy consuming industries react negatively to an increasing oil price while the Oil & Gas and the Basic Resources industry show a significant positive response. Since the financial crisis, all 13 investigated European industries respond positively to an increase in the price of oil and negatively to an increase in oil price volatility. We argue that investors interpret the price of oil as an indicator for future economic activity, which can increase investors' confidence. Little evidence of asymmetric effects of oil price changes on industry returns is found.