Abstract

In this paper we investigate the tradeoffs between oil price risk and stock market returns of the formerly Central and Eastern European Economics that are now new members of the European Union together with. An international multi-factor model that allows for conditional and unconditional risk factors is employed to investigate the relationship between oil price risk and stock market returns. The relationship between oil prices and world market returns is found to be statistically significant but negative for all estimated models. Oil rice beta is negative and statistically significant suggesting that the oil price is indeed an important factor in determining stock returns. No statistically significant non-linear dependency is found between market risk and emerging markets stock returns or between oil price risk and returns. Observation of conditional models shows negative reaction of emerging stock markets returns to both upward and downward movements of market returns but the reaction is more significant when the market is up. The reaction of the stock returns to upward and downward movements of the oil market is also negative but more significant when oil prices are down.

Keywords: Emerging Stock Markets, Market Risk, Oil Price Risk

JEL Classification: G12, G15, Q43