The effect of oil prices on stock prices: a structural time series approach

A structural time series model is estimated to examine the effect of oil prices on stock prices in three oil importing and four oil exporting countries. The results show that some missing variables affect the secular behaviour of, and that oil prices can explain cyclical variation in, stock prices. In all cases the effect of oil prices on stock prices turns out to be significantly positive. This finding is explained in terms of the positive effect running from economic activity to both oil prices and stock prices.