Development of the crude oil prices and the stock market

Abstract

In this paper we analyze the development of the Crude Oil Prices and the Stock Market since the decade of the 70´s. We identify the cycles and the upward and downward phases of these series and analyze a number of their features: the period or length of cycle, the duration of the upward and downward phases, the relative position of the high, the percentage of return during periods of upward and downward phases and the percentage of retracement of movement from low to high. We also analyze the degree of correlation between the Oil Prices and the Stock Market. We will find if the crude oil prices will explain what “drives” the stock market. Time series theory is of interest primarily for this analysis because they help identify market cycles and turning points in those market cycles. In this work we extract the trend and the cycle with the Hodrick Prescott (HP) Filter. The paper is organized as follows. Section 1 is an introduction. Section 2 uses the Hodrick-Prescott Filter to find the lows or turning points of the cycles. Section 3 develops a battery of measures of the behaviour of crude oil prices during the cycles and shows the results of applying these techniques to the cycles of the crude oil prices. Also, offers some comments on the similarities or differences of these phases with those of stock market. Section 4 concludes.