Relationship between oil price and sector index returns: Evidence from Nordic & Qatari markets

Abstract

The purpose of this paper is to investigate the relationship between oil price changes and stock market returns. The paper examines how oil price fluctuations influence on the returns of industry-level indices in Nordic and Qatari markets. The purpose for studying both markets is the aim of being able to compare sector-level oil price correlations between the stock markets of oil-importers and oil-exporters. By comparing the oil price correlations between the Nordic and Qatari markets, it is possible to find out the possible market-specific relationships with oil as a commodity.

The study investigates the relationship between unexpected oil price changes and sector index returns by examining the seven available sector indices from Qatar Stock Exchange and 24 Nasdaq OMX Nordic sector indices. The examined oil price index is West Texas Intermediate Cushing. The indices are analyzed with both weekly and monthly returns for the period from April 2012 to September 2017. The study utilizes a standard market model that is expanded with the oil price factor in order to estimate the sector-level correlation coefficients for oil price sensitivity. In addition, the paper examines if the oil price sensitivity is asymmetric or not. The asymmetric model is included with a dummy variable to capture the correlations for both positive and negative unexpected oil price changes.

This paper contributes empirical findings to the study of Nandha and Faff (2008). The contribution of this paper is presenting more focused and detailed information of the relationship between oil price changes and market-specific industry-level stock indices. Based on the main findings of this paper, the oil price sensitivities are both sector- specific and market-specific. In contrast to previous studies, this paper presents empirical evidence that oil price correlations are mostly positive across industries in both Nordic and Qatari stock markets.