Oil price shocks and Nigeria's stock market: what have we learned from crude oil market shocks?

Oil price shocks do not only originate from the supply‐side of the crude oil market but may also be demand driven. The impact of oil price shocks on stock market activities may be different depending on its origin (i.e. demand and supply shocks). This paper provides the first examination of the impact of the origin of oil price shocks on N igeria's stock market for the period 1995:1–2011:12. Oil price shocks is decomposed into oil supply shocks, aggregate demand shocks and oil‐specific demand shocks using a structural vector auto‐regression model, and their impacts on stock market prices were analysed using impulse response and variance decomposition analysis. The impulse response results show that stock market's response to oil supply shocks is insignificantly negative but significantly positive to aggregate demand and oil‐specific demand shocks. The cumulative effects of the oil price shocks account for about 47 per cent of the variation in stock prices in the long term. These results suggest that the origin of oil price shocks is crucial for understanding the volatility in N igeria's stock market. Future policy direction should focus on diversifying the economy to reduce its vulnerability to oil price fluctuations while addressing the inefficiencies in the stock market.