Decomposition of oil price Supply and demand shock in stock returns and economic performances

Abstract

Oil price shock has always been serving as a "mirror" reflecting the macroeconomic situation. However, it consists of different shocks from both demand side and supply side, and each side of the shock has different impacts on the economy. To extract more implications from oil price shocks, this thesis has several purposes. First, we proved the different lead-lag relationships between refined oil and crude oil during the shocks. Second, we utilized the properties of crack spread to define a new indicator that identify demand shock and supply shock in the total oil price change, and compared it with the traditional decomposition method, structural VAR model. Finally, we examined how much the decomposed shocks can explain the overall economic performances.