Explaining the time-varying effects of oil market shocks on US stock returns

- We document the emergence of a positive relation between oil price and stock returns from 2006.
- We study the effects of oil market shocks on stock returns using a time-varying SVAR.
- We find evidence of time-variation in the effects of oil-specific demand shocks.
- The short-term interest rate explains well time variation in the parameters of the SVAR.
- This suggests the importance of the ZLB in explaining the positive oil-stock relation.

This paper documents time-variation in the relation between oil price and US equity returns based on both reduced-form and structural analyses. Our reduced-form analysis suggests that the sign of the relation between real oil returns and real stock returns has changed over time, and that in the recent period this relation has turned positive since early 2007 (but started increasing since 2005). Based on our structural analysis, we find that oil-specific demand shocks have had positive effects on the US stock market since 2009 as opposed to oil supply shocks, which have no large effects on stock returns. We also show that the time variation in the parameters of the structural VAR is very well explained by the level of the US short-term interest rate and shifts in consumer confidence.