Financial factors affecting oil price change and oil-stock interactions: a review and future perspectives

Traditionally, fundamental factors of supply and demand were important in understanding oil price dynamics before the financial crisis. These factors, however, are no longer sufficient to explain the price behavior of the oil market in the post-financial crisis era since 2008. The financialization of oil futures markets has been responsible for changes in price behavior and co-movement between oil prices and financial asset prices, among others. The globalization of the world economy has further strengthened the interactions between oil markets and financial markets, which allows oil prices to exhibit more financial characteristics. This paper reviews current literature pertaining to financial factors affecting oil price change and the influence of oil prices on stock market returns and volatility. We conclude that the drivers of oil price change vary across different periods but the fundamentals remain the underlying causes affecting the long-term trend of oil prices. These financial factors are the important driving force for the extremely volatile oil price dynamics since the twenty-first century. When studying oil-stock interactions, it is important to consider a combined framework including the decomposition of oil price shocks, the asymmetry and time-varying effects of interaction, the impacts of structural changes and macroeconomic variables on the transmission of information, and risks in the oil-stock nexus. Finally, future research directions relating factors affecting oil price and the oil-stock nexus are highlighted. Specifically, the application of behavioral finance theory helps to explain the mechanism of oil price dynamics from a microperspective. The effect of changes in energy consumption structure and climate policies should be taken into account in understanding oil price change. Using of implied volatility index in the oil market and the stock market may provide new insight into the oil-stock nexus.