International Journal of Business and Management; Vol. 8, No. 18; 2013 ISSN 1833-3850 E-ISSN 1833-8119 Published by Canadian Center of Science and Education 101 The Influence of Oil Prices on Stock Market Returns: Empirical Evidence from Oil Exporting and Oil Importing Countries Dimitrios Asteriou 1,2 , Augustinos Dimitras 1 & Andrea Lendewig 3 1 School of Social Sciences, Hellenic Open University, Greece 2 School of Social Sciences, Open University of Cyprus, Cyprus 3 School of Social Sciences, City University, UK Correspondence: Dimitrios Asteriou, School of Social Sciences, Hellenic Open University, Bouboulinas 57-59, Patras, 26222, Greece. Tel: 30-94-710-0540. E-mail: d.a.asteriou@eap.gr Received: April 24, 2013 Accepted: July 4, 2013 Online Published: August 23, 2013 doi:10.5539/ijbm.v8n18p101 URL: http://dx.doi.org/10.5539/ijbm.v8n18p101 Abstract The aim of this paper is to study the impact of oil price fluctuations on the stock markets and the interest rates from oil importing and oil exporting countries. To this end, Vector Autoregressive (VAR) models are estimated and pairwise Granger Causality tests are performed to the stationary series in order to analyse the short-term relationships among the variables. Also, the Johansen approach for multiple equations is carried out in order to test for cointegration among the series. Finally, the existence of cointegration set the estimation of Vector Error-Correction Models (VECMs) to investigate the long-term links between the financial variables and the oil prices. The major findings of this paper include: first, the interaction between the oil prices and the stock markets is much stronger than with the interest rates in the short and in the long-run. Second, the impact on oil importing countries is more significant than on oil exporting countries. Finally, it might be possible that the fluctuations in oil prices have different effects on developed and developing countries. Keywords: oil prices, vector error correction models, causality 1. Introduction Oil is one of the most important sources of energy in the world at present. On the other hand, equities are priced depending upon the market valuation according to the firms’ performances and based on the expected profits. In other words, equity prices are the estimation of the profitability expected from an organization. Thus, since oil might represent a significant input in the companies’ production processes (directly or indirectly) boosting the production costs (when the price increases) and therefore decreasing the profits, oil price risks might be also priced in the stock markets. Hence, there may be an important influence from oil shocks on the stock market that allows the forecast of equity prices, due to the fact that, even if oil is a significant input or an output in the organization, changes in its price will affect profits. Therefore, decreases and increases in oil prices may be used to predict increases and decreases in equity prices. Despite the fact that, based on previous research, oil price changes seem to affect equity prices in a negative manner, a deeper analysis should be done as regard the different impacts on oil exporting and on oil importing countries. In the OPEC countries and in other oil exporter countries the effect of increases in oil prices should be positive, whereas for the oil importing countries the impact should be negative. On the other hand, the interest rates are defined as the price of money, and so they are determined by the supply and demand for money. Thus, since the interest rates are the price borrowers have to pay to the lenders when asking for a credit, changes in the interest rates have a major influence on the corporate profits, affecting the price of equities. The interest rates are also used to discount future values to find their present value. Therefore, it was considered important to include the rates of interest into our analysis, since the equity prices are mainly determined by the excepted cash flow stream and the discount rates. The majority of the relevant papers that are related to this topic concentrate their investigations on developed countries, mainly on the United States, Canada, Japan, Australia, and on European countries, most of which are oil importers. Very few are the studies that have been carried out in developing and oil exporting countries. This study aims to fill this gap by including a complete range of countries in the analysis. The analysis includes a set