Co‐movement among oil, stock, bond, and housing markets: An analysis of U.S., Asian, and European economies

• Published date: 01 June 2023
• Author: Nafeesa Yunus
• Date: 01 June 2023
• DOI: http://doi.org/10.1111/irfi.12402

ORIGINAL ARTICLE

Co-movement among oil, stock, bond, and housing

markets: An analysis of U.S., Asian, and European

economies

Nafeesa Yunus

Department of Accounting, Finance and

Economics, Merrick School of Business, The

University of Baltimore, Baltimore,

Maryland, USA

Correspondence

Nafeesa Yunus, Department of Accounting,

Finance and Economics, Merrick School of

Business, The University of Baltimore,

Baltimore, MD 21201, USA.

Email: nafeesa.yunus@gmail.com

Funding information

Summer REACH research award, Merrick

school of Business, University of Baltimore.

Abstract

This study explores the co-movement among oil and the

stock, bond, and housing markets of the U.S. and major

developed countries across Europe and Asia. The results

indicate that oil is long-run integrated with each asset class,

and that the extent of convergence has increased after the

onset of the 2007–2009 global financial crisis (GFC). More-

over, oil contributes most heavily toward the common

trends, implying that oil is the “leader”sector that drives

each asset class toward long-run equilibrium relationships.

Short-run analyses indicate that oil shocks induce a nega-

tive response in stock and housing returns and a positive

reaction in bond returns, showing a tendency to become

more intense and persistent after the GFC. When oil shocks

are disentangled, the results indicate that supply and

demand have heterogeneous effects on the three global

asset classes. Over the long-run, demand shocks make the

most significant contribution to the common trends and

“lead”the other asset classes, whereas supply shocks have

either a negligible or a weaker impact. Over the short-run,

demand shocks positively impact the stock and housing

markets and negatively impact bonds, while supply shocks

induce negative and weaker impacts on all three asset

classes.

Received: 19 October 2020 Revised: 2 August 2022 Accepted: 3 November 2022

DOI: 10.1111/irfi.12402

© 2022 International Review of Finance Ltd.

International Review of Finance. 2023;23:393–436. wileyonlinelibrary.com/journal/irfi 393

KEYWORDS

cointegration, common trends, crude oil, demand shock, financial

crisis, global bond market, global housing market, global stock

market, impulse response functions, market behavior, supply

shock

JEL CLASSIFICATION

C5, C58, F3, G0, G1

1|INTRODUCTION

Crude oil is an important commodity that plays a vital role in the global economy. Accordingly, several studies have

evaluated the impact of oil shocks on global stock market returns. However, the findings from these studies are

mixed, with some indicating that oil price movements have a negative impact on stock market returns,

1

while others

finding a positive relationship between oil price changes and stock market returns.

2

An emerging strand of research

has begun to evaluate the effects of disentangled oil shocks on the global stock markets, with initial studies

suggesting that supply and demand shocks have heterogeneous impacts on domestic and global equity markets.

3

Most studies have focused exclusively on the nexus between the oil sector and stock markets (both globally and

domestically), with comparatively little attention given to other asset classes, such as global bond or housing

markets.

In light of the above, the primary objective of this study is to analyze the long-run and short-run interactions

among oil and the stock, bond, and housing markets of the United States and several major countries throughout

Europe and Asia (Australia, Japan, France, Germany, the Netherlands, and the United Kingdom) within the same eco-

nomic framework. In addition to evaluating the overall effects of crude oil on the three asset classes, this study ana-

lyzes the effects of disentangled oil shocks (i.e., supply and demand shocks) on global stock, bond, and housing

markets. The entire analysis covers a 29-year period beginning in 1989:Q1 and ending in 2018:Q1. Moreover, the

pre-crisis, and the crisis and beyond periods are also evaluated to understand the dynamic co-movement and chang-

ing effects of oil shocks on the major asset classes under consideration.

This study makes the following significant contributions to the prevailing literature.First, it evaluates whether oil

is long-run integrated with the stock, bond, and housing markets. Second, it analyzes whether the 2007–2009 finan-

cial crisis increased the level of interdependence across oil and global asset classes. Third, this study examines

whether oil or any other asset classes contributes most heavily toward common stochastic trends and lead or drive

the remaining global asset classes toward long-run relationships. Fourth, impulse response function analyses (IRFs)

are implemented to (1) determine the short-run effects of oil shocks on stock, bond, and housing returns; (2) analyze

how long these shocks persist; (3) evaluate the sign of the relationship; (4) investigate whether shocks from oil have

persistent or temporary effects on asset returns; and (5) examine whether the short-run effects of oil shocks vary

over subperiods and across asset classes. Finally, the study evaluates the long-run and short-run effects of dis-

entangled oil shocks on the three broad asset classes.

To the best of our knowledge, this is the first study that utilizes robust time-series techniques to evaluate long-

run and short-run interactions among the oil, stock, bond, and housing markets within the same economic frame-

work. In addition, this is the first study to analyze whether the reaction of global asset classes to oil shocks is similar

or varies considerably across these major economies. Moreover, this is the first study to examine the effects of sup-

ply and demand shocks on three broad asset classes over different sampling horizons. As mentioned earlier, prior

studies have focused primarily on evaluating the interactions between oil and stock markets within and across devel-

oped and emerging economies, but little is known about the effect of oil shocks on the global bond and housing

markets.

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The results of this study are expected to offer crucial implications. If oil is found to be long-run integrated (coi-

ntegrated) with other financial assets (in one or more of the countries involved), it would imply that oil co-moves

with other financial assets and therefore does not provide long-run diversification benefits because shocks to one

asset market are transmitted across to others. In addition, if oil is found to have become highly convergent with the

other asset classes, especially after the crisis, it would suggest that macroeconomic shocks possibly intensified after

the crisis, and thus diversification benefits from investing in oil have been decreasing over time. On the other hand,

if oil is found to be segmented from the long-run relationships, this would indicate that diversification benefits can

still be attained by investing in the oil sector within countries where oil is found to be excludable from the long-run

relationships. Moreover, if oil is found to be the source of the common trends for one or more of the countries under

consideration (both prior to and after the crisis) it would imply that the oil sector is the “leader”sector or the “chan-

nel”of transmission from which shocks originate and then eventually ripple across to the remaining asset classes

over each subperiod. The short-term findings will shed some light on how each global asset class reacts when oil

shocks are imposed on them, how long these shocks exist, and whether these shocks have a permanent or temporary

effect. Analyses conducted after disentangling the oil shocks will also provide useful information. For instance, they

will help evaluate whether supply and demand shocks are integrated with the global asset classes, whether the

degree of convergence has increased over time (particularly after the global financial crisis), whether supply or

demand shocks can be identified as the “leader”variable, and how supply and demand shocks affect the three asset

classes over the short-run. The results also enable us to understand whether both supply and demand shocks signifi-

cantly affect the three major asset classes or they have differential impacts.

This study's overall findings will be beneficial to portfolio managers, hedge fund managers, and other institu-

tional investors interested in evaluating the dynamic interlinkages among the oil sector and the global stock, bond,

and housing markets during not only tranquil regimes but also periods of financial distress. The findings are also of

interest to policymakers who are eager to understand the similarities and differences in the way global asset classes

react when oil shocks are imposed on them during “normal”periods versus periods of high volatility. Finally, these

findings are of utmost importance to investors and policymakers who recognize the need to analyze the long-run

and short-run effects of supply and demand shocks on the three major asset classes, as it will enable them to make

more informed economic policy decisions.

The remainder of the paper is organized as follows: Section 2presents a relevant and up-to-date literature

review; Section 3enumerates the research question addressed in the study; Section 4provides a brief description of

the data; Section 5discusses the methodology; Section 6reports the empirical results; and Section 7contains con-

cluding remarks.

2|LITERATURE REVIEW

In the following sections, we review and summarize the literature that analyzes the interaction between oil and

global asset classes. We also briefly discuss some recent studies that evaluate the effects of disentangled oil shocks–

primarily on the stock market.

2.1 |Oil and the stock market

In a seminal study, Hamilton (1983) evaluated the link between oil and the macro-economy and found that all but

one of the U.S. recessions since World War II have been preceded, typically with a lag of around three-fourths of a

year, by a dramatic increase in the price of crude petroleum. He also provides evidence demonstrating that, even

during the post-World War II period (1948–1972), this correlation is statistically significant and non-spurious, thus

supporting the proposition that oil shocks were a contributing factor in at least some of the U.S. recessions prior to

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