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Oil Price Declines Could Hurt U.S. Financial Markets: The Role of Oil Price Level

Abstract:
This paper investigates the causal effects of oil price fluctuations on United States’ financial markets using daily oil price and financial market data from 2011 to 2016. To address endogeneity, we follow the heteroscedasticity-based identification strategy by Rigobon (2003) and instrument for changes in oil prices with exogenous shocks on current and future oil supply. We find that a decline in oil price negatively affected markets after 2014 when oil price was very low, but not before 2014 when the price was relatively high. These novel findings suggest oil price level could affect the impact of a decrease in oil prices on financial markets.

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Keywords: Oil prices, Financial markets

DOI: 10.5547/01956574.41.5.hngu

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Published in Volume 41, Number 5 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.

 

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