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Investor sentiment and oil prices

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Abstract

Although both theoretical models and anecdotal accounts suggest that investor sentiment in financial markets may be a potential determinant of oil prices, there has been no empirical research that directly addresses this question. We fill this gap. Our findings suggest that investor sentiment helps to explain the fluctuations in oil prices (as well as gasoline, heating oil and oil-company stock prices). High/low sentiment predicts subsequent low/high oil returns particularly at longer horizons. Our findings have important theoretical as well as practical implications. In terms of theoretical implications, our findings suggest that future theoretical models of oil prices should take into account both fundamentals and investor sentiment. In terms of practical implications, our findings imply a new predictor of oil prices.

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Notes

  1. See also Fattouh et al (2013).

  2. We thank Professor Jeffrey Wurgler for making these data available at people.stern.nyu.edu/jwurgler/.

  3. We thank Professor Lutz Kilian for making the data available at www-personal.umich.edu/~lkilian/.

  4. Exchange rates also affect financial markets (for example, Du and Hu, 2012; Du, 2014; Du and Hu, 2014).

  5. We thank Professors Fama and French for making these data available at mba.tuck.dartmouth.edu/pages/faculty/ken.french/.

  6. To save space, we do not report the coefficient estimates for other explanatory variables in Table 7. The results are available from the authors upon request.

  7. To save space, we do not report the coefficient estimates for other explanatory variables in Table 8. The results are available from the authors upon request.

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Authors and Affiliations

  1. The W. A. Franke College of Business, Northern Arizona University, PO Box 15066, Flagstaff, 86011, AZ, USA

    Ding Du

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  1. Ding Du
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  2. Ronald J Gunderson
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  3. Xiaobing Zhao
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Corresponding author

Correspondence to Ding Du.

Additional information

3received her PhD degrees from Nankai University, China and West Virginia University in 1999 and 2004 respectively. She is currently an Associate Professor of Economics in the W. A. Franke College of Business at Northern Arizona University. Her research applies economic theory and finance to climate change mitigation/adaptation strategies and natural resource conservation. She has published in Ecological Economics, Ecological Modeling, Journal of Economics and Business, Review of Quantitative Finance and Accounting and so on.

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Du, D., Gunderson, R. & Zhao, X. Investor sentiment and oil prices. J Asset Manag 17, 73–88 (2016). https://doi.org/10.1057/jam.2015.39

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