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Effects of Oil Price Shocks on the Stock Markets

Student: Geyman Lidiya

Supervisor: Vladimir Pyrlik

Faculty: St.Petersburg School of Economics and Management

Educational Programme: Economics (Bachelor)

Year of Graduation: 2016

In this paper VAR-EGARCH-M approach is applied to examine relationship between oil price fluctuations and returns on American and Russian stock markets. This model was preferred, as it allows for shock transmissions in both conditional returns and volatilities. In contrast to previous studies, the joint model includes all three indices (Brent Crude price, S&P 500 and MICEX) simultaneously, enabling more profound understanding of relationship between assessed indicators. The year of global financial crisis (2008) is excluded from the analysis to get unbiased results for pre-crisis and post-crisis periods. The achieved results suggest that that both oil price and S&P 500 index affect MICEX index significantly during the whole period assessed (years 2001-2016) and these effects originate from volatility fluctuations. Moreover, it is shown that alterations of S&P 500 index (both volatility and return changes) have an influence on oil price fluctuations in the post-crisis period (years 2009-2016). The outcomes of this paper can be applied by both policymakers and investors, who want to assess external risks when working with one of estimated markets, for example, in portfolio management with oil-risk hedging strategies.

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