Oil price and the U.S. stock market: a change in the long-run relation

Abstract

This paper shows that oil price and the U.S. stock market are associated in a long-run relationship. However, this linkage has the ability to reverse itself, and the regime prevailing after the structural change is not transitory—it may last a decade or more. A novel time series representing the number of barrels of oil needed to purchase the S&P500 is generated. Unit root tests and the cointegrating regression identify the presence of a structural change in the data occurring during the Asian crisis. Results suggest that new oil supply dynamics and a switch in the demand metrics would perform radical changes to the way stock markets and oil prices interact.