Oil Price Shocks on Norwegian Stock Returns

Abstract

There is a strong presumption that Norwegian stock return is dependent on oil price fluctuations. Previous research has focused mainly on the oil price affecting stock return. In this paper we show how Norwegian stock return is affected by different types of oil shocks. The different types of shocks are divided into oil supply shock, oil demand shock and oil specific demand shock. The methodology used is based upon the article “The Impact of Oil Price Shocks on the U.S. Stock Market” by Kilian and Park (2009). In accordance with their findings, we found that the type of oil shock, does matter for the reaction in the Norwegian market. While the oil supply and oil demand shocks are not statistically significant on the Norwegian market, they contribute with 13% of the long run variation in stock prices. Oil specific demand shock is, not surprisingly, statistically significant on Norwegian stock return, and explains 19% of the long run variation in stock prices. These results were as expected for a small open economy, exporting petroleum. In addition to this analysis, we have substituted Kilian’s own index for global aggregate demand with the Baltic Dry Index. This drastically changed the statistical importance of the aggregate demand shock.