Oil Price Based Trading And European Industry Sector Stocks

Abstract

This study shows that the relationship between oil price changes and European stock market is significant and vary in relation to individual industry sectors. The oil price changes exhibit significant Granger causality for majority of European industry sector stock returns, but no cointegration could be determined for the price series. The results are proved to be economically exploitable for trading strategies. The trading rule based on the bivariate VAR( ) model for forecasting future stock returns significantly outperforms the buy-and-hold strategy in term of expected return and risk. It yields large Sharpe ratios and significant positive Jensen's alpha for both weekly and monthly data.