______________________________________

OIL PRICES CRASH AND ITS IMPACT

ON STOCK MARKET: EVIDENCE FROM
INDIA
______________________________________
By

Abhilasha*
Menda Jeevitha**
*Pursuing MBA from FMS- WISDOM, Banasthali Vidyapith (An MHRD A Category and
NAAC A Grade Institution), Newai, Rajasthan, India.
Mobile: +91-8094624168
E-mail: mjbargavi@gmail.com
OIL PRICES CRASH AND ITS IMPACT ON STOCK MARKET: EVIDENCE FROM
INDIA

Although a lot of empirical research has studied the relationship between changes in oil price and
economic activity, it is surprising that little research has been conducted on the relationship
between oil price shocks and stock prices in India. Therefore, the main goal of this article is to
study the impact of oil price shocks on various indices of Bombay Stock Exchange (BSE) and
National Stock Exchange (NSE).The paper firstly studies the impact of oil price changes on
different indices of NSE and BSE and then adopts an event study approach with a window frame
of 120 days prior to a shock and 120 days after the event. The paper will help academicians and
researchers in understanding the dynamics of oil prices and stock markets. Further, evidence of
the relationship between oil price shocks on stock markets may also assist investors, speculators
for appropriate trading strategies in a period of volatile oil prices.

Keywords: Oil Price shock; Stock Market; India

INTRODUCTION
An unresolved research issue in stock market is the role played by oil prices. It is generally
believed that there is inverse relationship between the price of oil and the stock market. This kind
of view is also popular in financial press. But in reality, the relationship is much more
complicated as it appears.
Changes in the price of crude oil are often considered an important factor for understanding
fluctuations in stock prices. In the long-term, the influence of oil price on stock prices prevail, as
oil price effects are transmitted to macroeconomic indicators which influence liquidity of these
markets.
Decrease in Oil price reduces the cost of imported capital goods, therefore increasing the
prospects of higher profits for firms traded in Indian stock markets. On the demand side, fall in
oil price decrease the general level of prices, which translates into higher real disposable
income, and consequently increases demand. Besides the direct impact on general price levels,
oil prices also have secondary effects on wage levels, which in combination with high general
prices result in increased inflation. Inflationary pressures are usually controlled by central banks
through increase in interest rates. Given the higher interest rates, bond investments will become
more attractive than stock investments, which will result in lower stock prices. Finally,
increasing import prices trigger a deterioration of the terms of trade and therefore impose welfare
losses.
Furthermore, Liberalization and integration of international markets economies characterized
with increased level of capital flows and international investments in emerging have made global
investors more vulnerable to oil price impact on emerging stock markets(Chittedi 2010, 2011),
Therefore, understanding the level of susceptibility of stock prices in emerging economies to
movement in global oil prices is very important.
While most prior research on the relationship between oil prices and stock market could not find
strong and convincing evidence to support the proposition that oil prices drive the stock market
returns (Pescatori and Mowry, 2008., Fisher,2005., Agusman and Deriantino, 2008.,
Weiner,2005 and Apergis and Miller, 2009), yet a number of studies have found evidence to the
contrary. Some of the studies that shows that a relationship exists between oil prices and the
stock market include those of Sadorsky (2008), Aloui and Jamazi (2009), El-Sharif et al (2005),
Hammoudeh (2009), Gogineni (2007) and Rault and Aruori (2009). It is against this backdrop
that this study was carried out to find out whether oil price affects stock market performance in
India
The remainder of the paper is organised as follows: Section 2 provides review of previous
studies on the study topic; Section 3 presents nature of data and the methodology; Section 4
covers the discussion of the results; and Section 5 provides the conclusions of the study.

LITERATURE REVIEW
There have been a large number of studies stating relationship between oil prices and stock
return. Most of these studies have reported significant effects of oil price changes on stock
return. For example, Adorsky (1999), Papapetrou (2001), Ciner (2001), Yang and Bessler
(2004), Anoru and Mustafa (2007), Kilian (2008) and Miller and Ratti (2009) have investigated
the effects of oil prices on stock prices in developed countries. In addition, studies by Maghyereh
(2004), Onour (2007), Aliyu (2009), and Narayan and Narayan (2010) assessed the relationship
between oil prices and Vietnam’s stock prices with daily series from 2000 to 2008. Using the
Johansen test, the findings provided evidence of oil prices, stock prices, and exchange rates for
Vietnam sharing a long-run relationship. In addition, the study found both oil prices and
exchange rates have a positive and statistically significant effect on Vietnam’s stock prices in the
long-run and not in the short-run.
Bashar (2006) uses VAR analysis to study the effect of oil price changes on GCC stock markets
and shows that only the Saudi and Omani markets have predictive power of oil price increase.
Jones and Kaul (1996) examined the reaction of stock returns in four developed markets
(Canada, Japan, the UK, and the US) to oil price fluctuations on the basis of the standard cash
flow dividend valuation model. The study found that for the US and Canada stock market
reaction can be accounted entirely because of impact of oil shocks on cash flows.
Aloui and Jammazi (2009) show that rises in oil price play a significant role in determining both
the volatility of stock returns and the probability of transition across regimes. According to Aloui
and Jammazi (2009), if crude oil is a decisive determinant of economic growth, then increases in
crude oil market prices will be significantly linked to the firm’s expected earnings and
consequently their stock price levels.
Hwang (2011), the findings show that oil price and industrial production shocks explain
significant portion of the fluctuations in stock price movement. Similarly, Arouri et al (2010)
study indicated that stock market returns significantly react to oil price changes in some Gulf
Corporation Council (GCC) countries, thus providing evidence of a relationship between oil
price volatility and stock market performance (see also, Jawadi and Leoni, 2008; Constantinos et
al, 2010; Arouri and Rault, 2009).

Few studies have maintained that fluctuations in oil prices do not have any relationship with
stock market performance. In a study of 22 emerging economies (Nigeria not included),
Maghyereh (2004) findings imply that oil shocks have no significant impact on stock index
returns in emerging economies. Similarly, in Ghana, findings by Adjasi (2009) show that higher
volatility in Cocoa prices and interest rates increased volatility of the stock prices, whilst higher
volatility in gold prices, oil prices, and money supply reduced volatility of stock prices.
Furthermore, Agren (2006) argue that the stock market's own shocks, which are related to other
factors of uncertainty than the oil price, are more prominent in explaining stock price
movements.
Huang et al. (1996) examined the link between daily oil future returns and daily US returns.
Their evidence suggested that oil returns do lead some individual oil company stock returns, but
oil future returns do not have much impact on general market indices.
Further, a number of empirical research has studied the relationship between oil price shocks and
macroeconomic variables. Some papers investigated the impact of oil price shocks on different
countries’ real GDP growth rates, inflation, employment and exchange rates (such as Akram
2004; Chen and Chen 2007; Cunado and Gracia 2005; Davis and Haltiwanger 2001; Hamilton
1983, 2003; Hamilton and Herrera 2004; Hooker 2002; Huang and Guo 2007; Lee and Ni, 2002;
Lee, Lee, and Ratti 2001; Nandha and Hammoudeh 2007, among others). However, there is
relatively little work on the relationship between oil price shocks and financial markets.
Statistical Methods for Data Analysis
The aim of the present study is to empirically investigate the impact of oil price shocks on the
Indian stock market. The study uses data on daily closing price of NSE of India, closing price of
BSE and Oil price data from MCX website (Fig.1). The study covers a period from 14th
September, 2005 to 8th January, 2015. In case of days where trading did not take place on any of
the exchange the date was omitted for analysis. Thus only common dates were chosen for
analysis. Further, the data was split into different periods by considering the change in trends.
The data was plotted and carefully examined to see an specific breaks. From the graphical
analysis we got three break events see Figure 2 for details.

Fig.1
35000.00 10000.00
30000.00 9000.00
8000.00
25000.00 7000.00
20000.00 6000.00
5000.00
15000.00 Oilprice
4000.00
10000.00 3000.00 BSE
2000.00
5000.00 1000.00 NSE
0.00 0.00

Fig.2

Oilprice
9000.00
8000.00
7000.00
6000.00
5000.00
4000.00
3000.00 Oilprice
2000.00
1000.00
0.00
Further, other standard statistical measures like Mean, Median, Standard deviation, Skewness
and Kurtosis were employed for all the periods to know the basic characteristics of data. Finally,
correlation and granger causality tests were employed to determine the degree of correlation and
cause and effect relationship between the selected variables. A brief details of the measures used
is given below:

Mean
The mean is the most commonly-used measure of central tendency. When we talk about an
"average", we usually are referring to the mean. The mean is simply the sum of the values
divided by the total number of items in the set. The result is referred to as the arithmetic mean.

Median
The median is determined by sorting the data set from lowest to highest values and taking the
data point in the middle of the sequence. There is an equal number of points above and below the
median.

Standard deviation

Standard deviation (SD) is a widely used measurement of variability used in statistics. It shows
how much variation there is from the average (mean). A low SD indicates that the data points
tend to be close to the mean, whereas a high SD indicates that the data are spread out over a large
range of value.

Skewness and Kurtosis

Skewness is a measure of symmetry, or more precisely, the lack of symmetry. A distribution, or

data set, is symmetric if it looks the same to the left and right of the center point. Kurtosis is a
measure of whether the data are peaked or flat relative to a normal distribution. That is, data sets
with high kurtosis tend to have a distinct peak near the mean, decline rather rapidly, and have
heavy tails. Data sets with low kurtosis tend to have a flat top near the mean rather than a sharp
peak. A uniform distribution would be the extreme case.

Correlation Analysis

Correlation analysis measures the relationship between two items, for example, a security's price
and an indicator. The resulting value (called the "correlation coefficient") shows if changes in
one item (e.g., an indicator) will result in changes in the other item (e.g., the security's price).

The correlation coefficient can range between ±1.0 (plus or minus one). A coefficient of +1.0, a
"perfect positive correlation," means that changes in the independent item will result in an
identical change in the dependent item
Granger causality test

The Granger causality test is a statistical hypothesis test for determining whether one time
series is useful in forecasting another. Ordinarily, regressions reflect "mere" correlations,
but Clive Granger argued that causality in economics could be reflected by measuring the ability
of predicting the future values of a time series using past values of another time series.

Empirical Results
Descriptive Statistics
The descriptive statistics for each series for the event study of three Break periods i.e. 18 May
2006 (point value 3135.37), 30 Jun 2008 (point value 6117.50),27 Aug 2013 (point value
7400.81).The Statistics used for the analysis are mean, median, standard deviation (Std. Dev.),
skewness, kurtosis. The number of observations was reported on the various indices of Bombay
Stock Exchange (BSE) and National Stock Exchange (NSE) of BSE, NSE and Oil Prices, with a
window frame of 120 days prior to a shock and 120 days after the event.

Table 1: Values of Oil Prices

Oil prices upto2006 Oil prices upto 2008 Oil prices upto2013

Mean 2974.26 4290.052 6349.13

Median 2864.24 4268.877 6331
Std. Dev. 306.8 1118.74 532.75
Skewness 0.40 -0.22 0.30
Kurtosis 1.85 2.24 2.54
Observations 263 241 241

The descriptive statistics for all the variables are presented in Table 1 ,the highest mean value
analyzed for oil prices was 6349.12 in 2013 and the lowest was 2974.25 in 2006 . The highest
median analysis for oil a price was 6331 in 2013 and lowest was 2864.24 in 2006. The highest
Standard Deviation. was analyses for oil prices was 1118.74 and lowest was 306.80.This
interprets that in 2008 the oil prices are relatively more volatile. The value of skewness in 2006
was 0.40,in 2008 -0.22 and in 2013 -0.20.This interprets that in 2008 and 2013 the tail on the
left side of the probability density function is longer than the right side and in 2006 the tail on
the right side is longer than the left side, this indicates that the skewness coefficient is in excess
of unity it is considered fairly extreme and the low (high) kurtosis value indicates extreme
platykurtic (extreme leptokurtic). The highest kurtosis was analyzed 2.24 in 2008 and lowest
was 1.85 in 2006..This interprets that data sets with high kurtosis tend to have a distinct peak
near the mean, decline rather rapidly, and have heavy tails
Table 2: Values of BSE
BSE upto 2006 BSE upto 2008 BSE upto 2013

Mean 11051.16 14504.29 19880.4

Median 10858.5 14942.28 19920.2
Std. Dev. 1357.32 3089.07 864.71
Skewness 0.24 -0.32 -0.2
Kurtosis 2.12 2.41 2.06
Observations 263 241 241

Table 2 presents the highest mean analyzed for BSE was 14504.29 in 2008 and the lowest was
6349.12 in 2013 this interprets that the average value of Sensex was maximum in 2008. The
highest median analysis for BSE was 14842.28 in 2008 and lowest was 6331 in 2013.This
interprets that the Sensex value occurred maximum times in maximum months of 2008. The
highest Standard Deviation was analyzed for BSE was 1357.32 in 2006 and lowest was 532.75
in 2013.This interprets that in 2006 the fluctuation in Sensex value are relatively more volatile.
The value of skewness in 2006 was -0.24,in 2008 -0.32 and in 2013 0.30.This interprets that in
2006 and 2008 the tail on the left side of the probability density function is longer than the right
side and in 2013 indicates that the tail on the right side is longer than the left side. The highest
kurtosis was analyzed 2.54 in 2013 and lowest was 2.12 in 2006..This interprets that data sets
with high kurtosis tend to have a distinct peak near the mean, decline rather rapidly, and have
heavy tails.

Table 3: Values of NSE

NSE upto 2006 NSE upto 2008 NSE upto 2013

Mean 3257.61 4341.23 5944.23

Median 3199.35 4500.95 5980.45
Std. Dev. 358.8 899.53 248.01
Skewness 0.22 -0.3304 -0.49
Kurtosis 2.06 2.55 2.56
Observations 263 241 241

Table 3 presents the highest mean analyzed for NSE was 5944.23 in 2013 and the lowest was
3257.61 in 2006 this interprets that the average value of Nifty was maximum in 2013. The
highest median analysis for NSE was 5980.45 in 2013 and lowest was 3199.35 in 2006. The
highest Standard Deviation was analyzed for NSE was 899.53 in 2008 and lowest was 248.01 in
2013.This interprets that in 2008 the fluctuation in Nifty value are relatively more volatile. The
value of skewness in 2006 was 0.22,in 2008 -0.33 and in 2013 -0.49.This interprets that in 2008
and 2013 the tail on the left side of the probability density function is longer than the right side
and in 2006 indicates that the tail on the right side is longer than the left side. The highest
kurtosis was analyzed 2.56 in 2013 and lowest was 2.06 in 2006..This interprets that data sets
with high kurtosis tend to have a distinct peak near the mean, decline rather rapidly, and have
heavy tails.

Table 4: Values of Oil price

Full data Of oil Pre break of oil Post break of oil

prices prices prices
(2005 -2015) (27 Jun 2008) (27 Jun 2008)
Mean 5015.6 4006.78 5450.36
Median 5140.2 3942.12 5415.45
Std. Dev. 1315.66 969.65 1201.88
Skewness 0.19 0.39 0.09
Kurtosis 3.05 2.37 3.78
Observations 2311 696 1615

Table 4 presents the highest mean analyzed for oil prices was 5450.36 in post-data and the
lowest was 4006.78 in pre-data .This interprets that the average oil prices was maximum after the
event i.e. 27 Jun 2008 . The highest median analysis for oil prices was 5415.45 in post-data and
lowest was 3942.12 in pre-data. The highest Standard Deviation is analyzed for oil prices was
1315.66 and lowest was 969.65.This interprets that from 2005 to 2015(8 Jan) the oil price are
relatively more volatile s. The value of skewness from 2005 to 2015(8 Jan) was 0.19 , before the
event it was 0.39 and after the event it was 0.09.This indicates that the tail on the right side is
longer than the left side in all the series. The highest kurtosis was analyzed 3.78 after the event
and lowest was 2.37 before the event. This interprets that data sets with high kurtosis tend to
have a distinct peak near the mean, decline rather rapidly, and have heavy tails.
Table 5: Values of NSE
Values of NSE Values of NSE Pre
Full data break Values of NSE
(2005 -2015) ( 27 Jun2008) Postbreak (27Jun2008)
Mean 4394.44 3214.623 4902.893
Median 3919.61 2951.88 5254.69
Std. Dev. 1415.86 728.7415 1334.73
Skewness 0.18 1.911395 -0.38434
Kurtosis 1.61 6.677113 1.961538
Observations 2311.00 696 1615
Table 5 presents the highest mean analyzed for NSE was 4902.83 after the event i.e. 27 Jun 2008
and the lowest was 3214.62 before the event this interprets that the average value of Nifty was
maximum after the event. The highest median analysis for NSE was 5254.69 after the event and
lowest was 2951.88 before the event. The highest Standard Deviation was analyzed for NSE was
1415.86 and lowest was 728.74.This interprets that from 2005 to 2015(8 Jan) the fluctuation in
Nifty value are relatively more volatile. The value of skewness in2005 to 2015(8 Jan) was 0.18,
before the event 1.91 and after the event -0.38.This interprets that after the event the tail on the
left side of the probability density function is longer than the right side and other two series
indicates that the tail on the right side is longer than the left side. The highest kurtosis was
analyzed 6.67 before the event and lowest was 1.96 after the event. This interprets that data sets
with high kurtosis tend to have a distinct peak near the mean, decline rather rapidly, and have
heavy tails.

Table 6: Values of BSE

Values of BSE Values of BSE Pre Values of BSE
Full data break Post break
(2005 -2015) (27 Jun 2008) (27 Jun 2008)
Mean 16769.99 13577.67 18145.76
Median 17164.99 13650.84 18022.22
Std. Dev. 4371.05 3269.478 4056.309
Skewness 0.18 0.248627 0.080771
Kurtosis 3.14 2.272394 3.799615
Observations 2311.00 696 1615

Table 6 presents the highest mean analyzed for BSE was 18145.76 after the event i.e. 27 Jun
2008 and the lowest was 13577.67 before the event this interprets that the average value of
Sensex was maximum after the event. The highest median analysis for BSE was 18022.22 after
the event and lowest was 13650.84 before the event .The highest Standard Deviation is analyzed
for BSE was 4056.30 and lowest was 3269.47.This interprets that from 2005 to 2015(8 Jan) the
fluctuation in Sensex value are relatively more volatile. The value of skewness in 2005 to 2015(8
Jan) was 0.18, before the event 0.24 and after the event 0.08.This interprets that all the series
indicates that the tail on the right side is longer than the left side. The highest kurtosis was
analyzed 3.79 after the event and lowest was 2.27 before the event. This interprets that data sets
with high kurtosis tend to have a distinct peak near the mean, decline rather rapidly, and have
heavy tails.
Correlation
Correlation coefficients measure the strength of association between two variables. The greater
the absolute value of a correlation coefficient, the stronger the linear relationship. The strongest
linear relationship is indicated by a correlation coefficient of -1 or 1. It is the statistical measure
of how two securities move in relation to each other.

Table 7: correlation Matrix for Event Periods i.e. Full sample, pre crisis and post crisis

Full Sample
(2005-2015) Pre Crisis Post Crisis
Variables Corr. Prob. Corr. Prob. Corr. Prob.
NSE OILPRICE 0.65 0 0.48 0 0.52 0
BSE OILPRICE 0.64 0 0.46 0 0.52 0
BSE NSE 1 0 0.99 0 0.99 0

Table 7 precedes correlation analysis where we compare the correlation between three variables.
We studied correlation for three different period i.e. full sample period (2006-2015)
And the full sample period was split into two periods i.e. from 2006, 2008 and 2013 (pre crisis
and post crisis). The full sample period showed correlation value of 0.65. However the
coefficient was 0.48 in pre crisis and 0.52 in post crisis. The relationship was statistically
significant for all the three periods.

The Results of pre and post crisis period indicates increase in coefficient of correlation in pre
crisis period which move the degree of co-movement has increase after the crisis.

Table 8: correlation Matrix for Event Periods i.e. 2006, 2008 and 2013
Event BSE /Oil Price Prob. NSE /Oil Price Prob.
120 days after and before 18th May 2006 0.03 0.68 0.01 0.90
th
120 days after and before 30 June 2008 0.40* 0.00 0.41* 0.00
120 days after and before 27th August 2013 -0.08 0.22 -0.10 0.11
(* indicates significance)

Table 8, we see correlation for three different periods i.e. (2006, 2008 and 2013) 120 days pre
and post the occurrence of break. Where in we found for the first event i.e. 18 May 2006 the
degree of correlation between BSE and NSE is very less i.e.(0.03),(0.01) and not statistically
significant. However in case of our second event i.e. 30 Jun 2008 the value of coefficient
correlation was (0.40) and also statistically significant. On the contrary, in case of third event the
coefficient of correlation was negative but statically significant.
Even though the two data sets are correlates it doesn’t mean that one is the cause of the other. To
check the cause and effect relationship we further proceed to causality analysis using Granger
(1969) framework.

Linear Granger Causality

The Granger (1969) approach to the question of whether causes is to see how much of the
current can be explained by past values of and then to see whether adding lagged values of can
improve the explanation is said to be Granger-caused by if helps in the prediction of, or
equivalently if the coefficients on the lagged’s are statistically Significant. Note that two-way
causation is frequently the case; Granger causes and Granger causes.

Linear Granger Causality Test Results

The granger (1969) procedure is used to test for the linear causality among Oil prices, NSE and
BSE. It is used to describe the dependence of the mean value of one variable on one or more
other variables. Used in analysis of variance to test the Null hypothesis that 2 components
estimate the same variance against the alternative that the numerator estimates a greater variance,
the latter indicating a high “F-value”.

Table 9: Granger Causality (Pre break and post break)

Null Hypothesis Pre Break(27June2008) Post Break(27June2008)

F-Stat. Prob. F-Stat. Prob.

OILPRICE does not 5.76 0** 2.56 0.07
Granger Cause NSE
NSE does not 4.27 0** 1.12 0.32
Granger Cause OILPRICE
BSE does not 8 0** 2.59 0.07
Granger Cause NSE
NSE does not 6.51 0** 1.16 0.31
Granger Cause BSE
BSE does not 4.45 0** 2.4 0.09
Granger Cause OILPRICE
OILPRICE does not 6.5 0** 1.51 0.21
Granger Cause BSE

(** indicates significance)

In Table 9, through our previous data we again study the causality for two periods i.e. pre break
and post break periods. In pre break period all the hypothesis were rejected which indicates by
bi-directional causality between Oil prices and stock market indicators.However,the result are
contradictory in the post break period where the null- hypothesis is accepted and 5% level of
Significance.
Table 10: Granger Causality (Event Periods)
Null Hypothesis: 2006 2008 2013
F-Stat P. F-Stat P. F-Stat P.
OILPRICE does not Granger Cause NSE 0.97 0.38 3.85 0.02* 2.41 0.09*
NSE does not Granger Cause OILPRICE 0.73 0.48 0.60 0.55 0.87 0.42
BSE does not Granger Cause OILPRICE 0.72 0.49 0.65 0.52 0.59 0.56
OILPRICE does not Granger Cause BSE 1.10 0.33 3.76 0.02* 2.96 0.05*
(* indicates significance)

In Table 10, finally we proceed with the Granger Causality for our event periods. In case of first
break we found no causality between the Oil prices and stock market indicators. However in case
of second event we found unidirectional causality running from Oil prices to NSE. In case of
third break we again found unidirectional causality running from Oil prices to stock market
indicators.

FINDINGS & CONCLUSION

This study examined the inter-linkage between the Indian stock market indices and oil prices
using correlation and granger causality. The analysis used the daily data for the period of April
2005 to December 2015 which are obtained from. To conclude, we observed change in the
pattern of relationship in the three different periods. As, from the preliminary analysis we could
see the difference in the observed values which was reflected when we perform correlation and
causality analysis. If we compare the different periods we have studied, we found evidence of
Oil prices impacting stock market to a greater extent. The results provide further support to the
theory that Oil prices do impact the market in the short run as well as long run .Further the
relationship is very dynamic and is not easy to predict as in three different periods the price
behaves differently. The results contribute to existing literature and suggest that Oil prices do
influence the stock prices. The results have important implications for investors which can take
cues from the Oil price movement while taking their investment decisions.
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