The Effect of Oil Prices on Stock Market Returns of USA and UK

Oil has very important role for an economy. Sudden changes of oil prices can directly influence nations eco-nomies. The objective of that research is to find out the impact of OPEC oil prices on UK’ and USA’ stock returns between the years of 1980-2014. In that research, Granger causality analysis was applied first. After implementing that method, impulse response analysis and break regression analysis was applied. Moreover, in order to strengthen the break regression result and to find the regime impacts, Markov regime switching analysis was also implemented. Analysis results indicated that oil price shocks increased interest rate and diminishes stock market returns in UK and oil price shocks diminishes interest rate and stock return in USA and oil prices had significant negative influence on USA and UK stock market returns between the years of 1981-1985