OIL AND THE STOCK MARKETS

We test whether the reaction of international stock markets to oil sho cks can be justified by current and future changes in real cash flows and/or changes in expected returns. We find that in the postwar period , the reaction of United States and Canadian stock prices to oil shock s can be completely accounted for by the impact of these shocks on rea l cash flows alone. In contrast, in both the United Kingdom and Japan, innovations in oil prices appear to cause larger changes in stock pri ces than can be justified by subsequent changes in real cash flows or by changing expected returns.