Relationship between Oil Prices and Stock Markets: Focusing on Top World Oil Consumers

As said in Proverbs(28:20) and Second Corinthians(9:6), stock investment, not speculation, can be promoted only if efficient risk management is put in place. This study examines the impact of oil price changes on stock price performances of top world consuming countries in order to provide investors in stock markets with an opportunity for global portfolio optimization. Monthly stock prices and oil prices for ten countries (USA, China, Japan, Russia, India, Brazil, Saudi Arabia, Germany and Korea) from July, 1997 to March, 2015 are modeled for EGARCH(1,1) estimation. The empirical results indicate that all stock markets except for Germany are positively correlated to the changes in oil prices with Russian and Canadian markets having particularly strong correlation with oil price changes, and there is only one Granger causal relationship to Indian stock market from oil price changes at 5 percent significance level. With respect to the spillover effect of returns and conditional variance by EGARCH(1,1) estimations, oil price changes impact stock market performances in all countries and the volatility spillover from oil prices is found in stock markets in USA, China, Japan, Brazil and Canada. The Christian stock investment can be supported by this study considering its contribution to the efficient investment risk management.