Lower Oil Prices’ Impact on the Stock Markets

Executive summary

This paper will analyse the relationship between lower oil prices and the stock markets. In this case, lower oil price is the dependent variable while stock market performance is the independent variable. The analysis will be based on the Moscow Exchange Market analysis. Besides, the research paper targets to review existing relationship between general oil prices and stock performance in the ideal securities exchange market. The analysis will be based on regression with a sample of 100 firms from the Moscow Exchange Market.

Problem statement

Establishing the impact of reduced oil prices on stock markets is significant in making informed investment decisions, especially when the lowered prices are projected to remain constant for a reasonable period of time. Series of past research studies have been carried out to focus on general impact of oil price swings on performance of stock markets. Most of these studies have focused on the Western stock markets. However, there is no past study on the relationship between returns in stock and lowered oil prices within the Moscow Exchange Market. It is important to review the relationship between lower oil prices and performance of the Moscow stock market. This relationship will explain the behaviour of stock markets as influenced by the prevailing oil prices.

Aims and objectives

The purpose of this research project is to establish the underlying impact of lowered oil prices and performance of stock markets. Specifically, the research paper will establish direct and indirect impacts of lowered oil prices on stock markets.

Research questions

The research project will be limited to the following questions:

1. What is the relationship between lower oil prices and stock market performance for the Moscow Exchange Market?
2. What is the relationship between stock returns and the Moscow Exchange Market following the reduced global oil prices?

Research hypothesis

Null hypothesis: There is a relationship between lowered oil prices and performance of stocks at the Moscow Exchange Market.

Alternative hypothesis: There is no relationship between lowered oil prices and performance of stocks at the Moscow Exchange Market.

Rationale for the research

The findings of the research project will be beneficial to investors within the Moscow Exchange Market in making investment decisions based on the relationship between lowered oil prices and general stock market performance. Besides, the recommendations made may enable the companies trading in the Moscow Exchange Market to adopt the most sustainable stock policies to survive the dynamics created by swings in global oil prices. The study will not be a magic bullet in the alteration of investor behaviour as related to the impact of swings in oil prices on stock returns. It will only provide structures that must be combined with the values and goals of different investment options influenced by the swings in the global oil prices. Therefore, the firms and investors cannot implement the recommendations without reflecting on external and internal dynamics that influence lowering of the global oil prices.

Methodology

Research Methods

Research approach

This research will be carried through qualitative approach. Use of the qualitative research approach will facilitate understanding of the dynamics surrounding the lower oil prices and stock markets. This approach will create room for further analysis using different and divergent tools for checking the degree of error and assumption limits.

Sample selection and sample size

The researcher will use convenience sampling in selecting the 100 firms with the three sectors. The main reason behind the use of convenience sampling technique is that it is time saving. To generate the sample size for this study population, the research will adopt the formulae created in 1972.

n=N/ (1+N (e²))

Where:

• n = sample size
• N= Target population
• e= Degree of freedom
• n=100/ (1+100*0.05²)
• n=100/1.25
• n= 80

According to the Central Limit Theorem (CLT), if the sample size is large than 30, as will be the case in this study, X-bar is approximately normally distributed, regardless of the shape of the population. This suggested sample population is therefore suitable for the study.

Dependability and reliability

Dependability will be assured by providing clear, detailed, and sequential descriptions of data collection and analysis procedures. It is a quality that is relying on the study design being congruent with clear research questions, having an explicit explanation of the status and roles of the researcher, providing findings with meaningful parallelism across data sources, specification of basic theoretical constructs and analytical frameworks and data collection across a range of settings. This study seeks to fulfil these criteria as much as possible.

Methodology justification

Use of the qualitative research approach will facilitate understanding of the relationship between stock returns and accounting ratios. Attributes of the subjects under study will be qualitatively studied through observation, where the researcher will collect data using an observation schedule during data mining from different financial sites. Qualitative methods used in this study will generally apply to the analysis of the collected data where analytical tools such as chi square, regression and correlation methodologies will be used. These methodologies will help in identification of statistical patterns in the data on the relationship between stock returns and accounting ratios.

Expected results

It is expected that the lowered oil prices have direct and indirect impact on stock market performance with reference to the Moscow Exchange Market.

Analysis Methods

Data analysis

The collected data will be coded and passed through Statistical Package for Social Sciences (SPSS), version seventeen. In the process, cross tabulation will be used to compare and contrast the relationship between the lowered oil prices and stock markets performance. In order to quantify the relationship between the independent and dependent variable, regression analysis will be essential besides figures, charts, and tabular representation of the investigation. In order to aid the regression analysis, software such as Goggle Docs, Excel, SPSS, and Views will be used.

Regression model

In order to review the correlation between stock returns and reduced oil prices, ordinary least square regression will be used. Below is the formula.

Y = α + β₁X₁

Where:

• Y = Stock Return (dependent variable).
• α =Value of Y at the point where explanatory variables’ values are zero.
• β =Parameter indicating average alteration in Y; associated with each unit alternation in variable X.
• X= Independent Variable.

In relation to the New York Stock Market and the London Stock Market, X₁ will represent the ratio of reduced oil prices.

Ethical considerations

During the data collection phase of this study, the researcher will strive to uphold ethics appertaining to scientific research. Authorization for conduction of this study will be sought from relevant authorities to ensure transparency. The researcher has prior training and experience in data collection and analysis at the college level. Credibility is enhanced by adopting distinct quantitative and qualitative approaches to gathering data and reporting findings. Transferability of the results is theoretically possible by gaining a sufficiently large sample that will be representative of the data population.

Resources and costs involved

Resources

The literature review will be based on past case study researches, financial journals, academic books, and online finance websites such as yahoo.com, aastocks.com, reuters.com, google.com, and bloomberg.com. These sites are authentic since most of materials in them are from reputable firms. The academic journals to be used in this research paper will be selected from academic and authentic financial sites such as Pro Quest, Harvard Business Review, Emerald, ABI, google.com, and BNU e-database. The sources to be used in the paper will be eight, that is, four from academic journals and four from others sources such as books, pamphlets, past reports, and authentic websites.

Costs

Since this research will depend on secondary data, the cost of carrying out the study will be very minimal and is projected to be below $300.

Other Details: Research Timeline

Week 1: Research Commencement

This stage will involve reviewing the research topic and rationale for the proposed hypothesis. This stage may take one week, since choosing the topic will be dependent on available literature.

Week 2: Choosing the case study

Choosing the case study will be very challenging as research papers adopt different approaches. Specifically, I will have to choose the most convincing research variables from different research articles with a diverse approach to the research questions.

Week 3: Background research

Since materials are available for the research topic, I will have an easy time in merging the relevant material to the research question. This stage may take two weeks to accomplish.

Week 5: Conducting the literature review

This stage will be very demanding, since different sources of information will be searched. The sources of information that will be probed include the internet, the university library, course notes and public libraries with relevant information on the topic of research. I will concentrate on scholarly papers, conference proceedings, and relevant books.

Week 6: Collecting data and analysing data

This stage will be the most difficult in the research study. I will have to balance methods of research to present information about the topic. Data collected from financial statements will have to be scrutinized in detail. Each model and approach will have to be comprehensive to ensure that the researcher establishes deep answers, which provide an insight into the research problem to solve through the use of Goggle docs software.

Week 7: Research conclusion

Emerging themes will be identified and the findings will be interpreted and related to the research question. I will have to manage the data findings and interpretation within the scope of the research topic despite any research dynamics that may arise in the process. The final study will be reviewed to confirm its comprehensiveness in answering the research question before submission. The above timeline is summarized below.

Research timeline

Literature review

Several past researches have been carried out to establish the relationship lowered oil prices and performance of different stock markets across the world.

Effects of lower oil prices on economy

Lower oil prices have the potential of systematically dragging the prices of many commodities downwards as is the current situation in Russia. As a result, this effect is disastrous to the emerging companies that rely on selling raw materials because of the capital flight and increasing inflation. In the long run, if the lowered oil prices remain constant over a relatively extensive period, the deflationary pressures are likely to widen and destabilise stock performance of many companies. This will result in the central bank of Russia creating stringent policies to arrest the trend and may end put the economy on stimulation phase for growth.

According to Giblet and Bang (2003), oil is a very important global commodity as a financial asset. Therefore, “oil price deflation can also ‘spill over’ to other financial assets, causing their decline as well, in a ‘chain like’ effect”. The detrimental effects will spill over in the all the primary and secondary sectors of the economies across the globe. For instance, derivative of various bonds that are traded in the stock market are likely to crash. In the end, “when debts can no longer be serviced, defaults follow sucking liquidity from the system which leads to a sudden (and excruciating) re-pricing event”.

According to Basher and Sandusky (2009), deflation of oil prices has potential of catalysing financial defaults across financial firms. The “collapse of financial assets associated with oil could also have a further ‘chain effect’ on other forms of financial assets, thus spreading the financial instability to other credit markets”. This has the effect of lowering the performance of stocks of different companies trading in a stock market.

Theoretical perspective

In the environment of financial review, the efficient market hypothesis theory (EMH) is a general thinking which assumes that “the existing stock prices indicate the denomination of the business according to the materials available”. This theory proposes that persons trading are not in a position to receive excessive gains within the information disclosed. However, the key assumptions within the efficient market hypothesis are highly questionable. For instance, the hypothesis alleges that stock returns are highly implausible since they are approximated from price movements. As indicated by the efficient market hypothesis, the primary dynamic that contributes to price vacillations is the level of accessibility of inventive idea. In relation to the stock markets, prolonged reduced oil prices may result in unpredictable fall in the liquidity of companies trading. As a result, stock holders may be triggered to dispose their stocks. When everyone is disposing their stocks, the share prices for major players in the stock markets will definitely fall.

Bibliography

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Basher, S.A., & Sadorsky, P., “Oil price risk and emerging stock markets,” Global Finance Journal, vol. 17, no. 1, 2009, pp. 224-251.

Blanchard, O., & Gali, J., “The macroeconomic effects of oil shocks: Why are the 2000s so different from the 1970s?” NBER Working Paper 13368, vol. 14, no. 5, 2011, pp. 23-32.

Grinblatt, M., & Bing, H., The Disposition Effect and Momentum, Wiley and Sons, New York, 2003.

Hamilton, J.D., “What is an oil shock?” Journal of Econometrics, vol. 113, no. 12, 2008, pp. 363-398.

Hebner, M., Index Funds: The 12-Step Program for Active Investors, IFA Publishing, Alabama, 2007.

Malkiel, B., “The efficient market hypothesis and its critics”, Journal of Economic Perspectives, vol. 17, no. 1, 2003, pp. 59-82.

Shiller, R., Irrational Exuberance, Princeton University Press, New York, 2005.