Oil market narratives and their economic effect

Abstract

This thesis investigates the economic importance of oil narratives in affecting financial markets over the period 1984 to 2018. Over this period oil narratives are of particular interest due to geopolitical events that are communicated through media and influencing the oil market. Over 100,000 oil-related articles from Wall Street Journal and New York Times are collected and narratives are identified using natural language processing (NLP) techniques. The identified narratives are then incorporated into models with different financial markets variables, mainly oil market returns, stock return and risk, and renewable energy company returns along with oil shocks. My main findings show that narratives of oil market news have a significant impact on financial markets. Geopolitical narratives, however, have the greatest economic impact on all three markets in terms of statistical significance and the size of coefficients. This supports Shiller’s (2017) suggestion that narratives with investors interest are relevant to economic fluctuation. I find that negative geopolitical narratives and geopolitical narratives coverage impact oil returns positively. Analysis shows that the reaction is immediate and does not reverse the following days. This impact is indeed on average larger in magnitude during geopolitical events. I also find oil narratives’ impact extends beyond the oil market as there is a significant robust relationship between oil media narratives and both the overall stock risk and returns, and renewable energy companies’ returns. The impact of oil narratives on renewable energy stock returns is significant only when associated with oil shocks that are caused by concerns in the shortfall of oil supply due to geopolitical events. These findings serve as evidence for Shiller’s hypothesis that media can hype the market through spreading narratives to all the market’s investors during state of economic uncertainty such as an oil shock.