Stock market equities and oil prices: connection and premises

Purpose – the study has two main objectives. First, it is aimed at proving that the price of oil affects the fall of the stock index through the deterioration in the credit quality of the oil-exporting country as Kazakhstan. The second objective of the study is to study the effect of oil price volatility on the stock index and the interest rate as one of the main indicators of macroeconomic policy.

Methodology – this study was carried out in program R. The quantitative approach includes variance in the structural model of VAR. It is based on the data of monthly time series for Kazakhstan, for the period from August 2000 to August 2017, that is, 205 observations, for z_t = (prod_t, rea_t, rpot, kase_t) where prodt is the percentage change in production in the world crude oil market, rea_t the real economic activity index, rpot real oil price, and kaset KASE stock index. The forecast-error-variance decomposition has been carried out, which allows one to assess the impact of structural shocks in the crude oil market on the variability of the KASE index, the impact of structural shocks in the crude oil market on exchange rate volatility and the impact of volatility from structural shocks in the crude oil market on exchange rate volatility, respectively.

Originality/value – in the context of globalization, the main indicator of the economic stability of the country are oil prices. The period under study includes significant volatility and two sharp falls in oil prices. The originality of the work lies in the fact that the volatility of world oil prices and its impact on the stock market of the Republic of Kazakhstan will be studied. The authors will also investigate the creditworthiness of the country, taking into account that Kazakhstan has been an oil producing country for many years. Based on these data, the authors explore a number of factors, such as aggregate demand, the dollar index and market fear (VIX), also including the prices of quoted products on the exchange (copper, gold). An analysis of the links between these variables will help to better understand the causes of the disruption of the relationship between stocks and oil.

Findings – according to the conducted studies, the authors found that aggregate demand is the strongest factor affecting the stock index. Also, this study showed that during the analysis period, the impact of oil production shocks on the equity market is insignificant on average and they can be neglected, while a fall in oil prices affects the financial condition, damaging the solvency of the oil-exporting country as Kazakhstan. Shocks of aggregate demand affect the stock index and account for at least 12% of its volatility, but in the long run, oil prices account for about 61% of the total variance in the stock index. With a positive shock of aggregate demand, the stock market index tends to grow. The authors believe that the decline in oil prices is associated with a worsening in the credit quality of the country, where the reduction is statistically significant and tends to last for a long period. Credibility can be a leading indicator of financial conditions and economic activity, as a consequence of macroeconomic policies aimed at stabilizing the credit crisis. Moreover, the result indicates that an increase in economic activity may have a feedback to oil prices in the medium term, which in turn may affect expectations about future economic conditions.

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