Betting on War? Oil Prices, Stock Returns and Extreme Geopolitical Events
Knut Nygaard (Oslo Metropolitan U.) and L.Q. Sørensen (Storebrand Asset Mgt.)
July 2023
We show that the ability of oil price changes to predict stock returns is largely limited to five extreme geopolitical events: the 2022 invasion of Ukraine, the 2003 invasion of Iraq, the 1990/91 Persian gulf war, the 1986 OPEC collapse, and the 1973 Arab-Israel war. In the counterfactual scenario where these events did not occur, the t-statistics are reduced on average 75% as compared to that reported by Driesprong, Jacobsen, and Maat (2008). We also find that a market-timing trading strategy based on oil price changes typically generates insignificant abnormal returns, contradicting previously published results. Our findings serve as an example of how a significant predictor in a time series forecasting regression does not necessarily constitute a useful or profitable market-timing signal.

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