The impact of oil price shocks on the U.S.stock market after becoming a net oil exporter

Abstract

In our thesis, we study the effects of oil price shocks on the U.S. stock market. The U.S. has transitioned from being a net importer of oil, to becoming a net exporter in recent years. This is mainly due to “The Shale Oil Revolution” which was made possible by technological innovation. Our main analysis is motivated by our hypothesis that U.S. real stock returns now react positively to a positive oil price shock. Contrary to the old common perception that stock returns in the U.S. decrease when the oil price increases. We used the framework by Kilian & Park from their article “The Impact of Oil Price Shocks on The U.S. Stock Market” (2009). They used a Structural Vector Autoregressive (SVAR) model, to capture the dynamics between the variables. Using our subsample in our model, we found that U.S. stock returns now respond positively to positive oil price shock. After our main analysis, we offer some critique to Kilian & Park, mainly regarding The Kilian Index, as well as discuss other possible specifications of the model.