The Impact of Oil Price Fluctuations on Stock Prices: Evidence from three Asian Countries

Abstract: This paper examines the relationship between oil price changes and the stock market and tests whether changes in the oil price can forecast stock returns. In order to investigate this query a regression-based approach is employed using the stock indices of three Asian emerging markets, namely Indonesia, India and China for the period January 1993 – April 2006. These countries have all experienced a rapidly growing oil demand during the investigated time period. Being the most populous countries in the world, excluding the U.S., this will have a hefty impact on global oil consumption. Also, as oil prices during the last few years have been at their highest levels since the oil crisis in the seventies, this study assesses if different levels of the oil price affect this factor’s liaison with stock returns. Our results indicate of the presence of an oil effect in the case of the Indian stock index, whereas no such effect can be identified for the Indonesian or the Shanghai index. Nor do we find significant evidence of an altered oil effect at different oil price levels.