Oil price shocks and stock market activities: Evidence from oil-importing and oil-exporting countries

While the relationship between oil prices and stock markets is of great interest to economists, previous studies do not differentiate oil-exporting countries from oil-importing countries when they investigate the effects of oil price shocks on stock market returns. In this paper, we address this limitation using a structural VAR analysis. Our main findings can be summarized as follows: First, the magnitude, duration, and even direction of response by stock market in a country to oil price shocks highly depend on whether the country is a net importer or exporter in the world oil market, and whether changes in oil price are driven by supply or aggregate demand. Second, the relative contribution of each type of oil price shocks depends on the level of importance of oil to national economy, as well as the net position in oil market and the driving forces of oil price changes. Third, the effects of aggregate demand uncertainty on stock markets in oil-exporting countries are much stronger and more persistent than in oil-importing countries. Finally, positive aggregate and precautionary demand shocks are shown to result in a higher degree of co-movement among the stock markets in oil-exporting countries, but not among those in oil-importing countries.     

Interrelationship between crude oil and the stock markets of major demanders and suppliers in emerging and developed markets

This paper investigates the time-varying relationship between the stock markets of advanced and emerging oil-exporting and oil-importing countries and the international crude oil price indices. The results reveal that the time-varying among the oil-exporting and oil-importing countries responds similarly to aggregate supply- and demand-side effects. Oil-exporting countries have a slightly higher integration with the oil markets, while oil supply shocks have a slightly higher impact on emerging oil-exporting countries. The oil markets exhibit a lower time-varying relationship with the Asia-Pacific oil-importing markets, which indicates those markets may be attractive to investors during periods of turbulence in the oil market.     

Oil shocks and stock volatility: new evidence via a Bayesian,graph-based VAR approach

ABSTRACT

This article examines the temporal dependence between three oil shocks and realized volatility in the stock markets of G20 countries between 1994 and 2019. By applying a novel, graphical, Bayesian VAR (BGVAR) model, we calculate unidirectional linkages of oil and stock volatility with a full and segmented sample. The results suggest an overall causality from stock volatility to oil shocks. For certain short, specific periods, the causal direction reverses. Depending on the country and the source of an oil shock, the magnitude and type of the effect can vary considerably. Specific oil-market shocks occur most often in our full sample. In a time-varying structure, oil supply shocks’ impact on stock volatility is more prominent, and net oil-importing countries’ responses to these shocks are greater than for oil-exporting countries. In addition, we find that relationship dynamics can capture market information, such as global economic growth during the 2008–2009 financial crisis.     

Financialization of food. Modelling the time-varying relation between agricultural prices and stock market dynamics

This article studies the correlation of agricultural prices with stock market dynamics. We discuss the possible role of financial and macroeconomic factors in driving this time-varying relation, with the aim of understanding what caused positive correlation between agricultural commodities and stocks in recent years. While previous works on commodity-equity correlation have focused on broad commodity indices, we study 16 agricultural prices, in order to assess patterns that are specific to agricultural commodities but also differences across markets. We show that an explanation based on a combination of financialization and financial crisis is consistent with the empirical evidence in most markets, while global demand factors don’t appear to play a significant role. The correlation between agricultural prices and stock market returns tends to increase during periods of financial turmoil. The impact of financial turmoil on the correlation gets stronger as the share of financial investors in agricultural derivatives markets rises. Our findings suggest that the influence of financial shocks on agricultural prices should decrease as global financial tensions settle down but also that, as long as agricultural markets are ‘financialized’, it might rise again when it is less needed, i.e. in the presence of new financial turmoil.     

Volatility transmission between oil prices and banks' stock prices as a new source of instability: Lessons from the United States experience

This paper examines whether American banks' exposure to the oil industry could lead to instability in both oil and financial markets. To address this issue, we investigate volatility spillovers between oil prices and the stock prices of the four major American banks involved in the oil industry by employing the vector autoregressive fractionally integrated moving average framework. We use high-frequency data from January 3, 2006, to June 30, 2016. Our results support the existence of such volatility spillovers, as evidenced by the significant volatility responses of oil price (banks' stock price) to a shock in banks' stock price (oil price). These responses, more pronounced following the banks' exposure to the shale industry, mainly reflect the financial fragility of shale companies and their high indebtedness levels. Thus, this paper emphasises how the shale oil industry could trigger turmoil in both oil and financial markets.     

OIL PRICE SHOCKS AND STOCK MARKET BOOMS IN AN OIL EXPORTING COUNTRY

This paper analyses the effects of oil price shocks on stock returns in Norway, an oil-exporting country, highlighting the transmission channels of oil prices for macroeconomic behaviour. To capture the interaction between the different variables, stock returns are incorporated into a structural VAR model. I find that following a 10% increase in oil prices, stock returns increase by 2.5%, after which the effect gradually dies out. The results are robust to different (linear and non-linear) transformations of oil prices. The effects on the other variables are more modest. However, all variables indicate that the Norwegian economy responds to higher oil prices by increasing aggregate wealth and demand. The results also emphasize the role of other shocks; monetary policy shocks in particular, as important driving forces behind stock price variability in the short term.     

International stock markets comovements: the role of economic and financial integration

The contribution of economic and financial integration to international stock markets comovements are investigated by means of a large scale macroeconometric model, set in the factor vector autoregressive framework (F-VAR). The findings point to a relevant role for both economic and financial integration in explaining international stock markets comovements for the G-7 countries. While economic integration would exercise its effects through the common response of stock markets to global economic shocks, financial integration would operate through financial shocks spillovers, particularly at the regional level.      

Exchange rates of oil exporting countries and global oil price shocks: a nonlinear smooth-transition approach

This paper models logistic and exponential smooth transition adjustments of real exchange rates for six major oil-exporting countries in response to different shocks affecting oil prices. The logistic form captures asymmetric and the exponential form symmetric adjustments in regards to positive and negative oil price shocks. We chose oil-exporting countries that do not peg their exchange rates. For most countries, we detect no statistically significant non-linearities for the adjustment process of real exchange rate returns, be they asymmetric or symmetric, in response to oil supply shocks, idiosyncratic oil-market-specific shocks, and speculative oil-market shocks. Exceptions are oil supply shocks in the UK and possibly Brazil, where exchange rates respond nonlinearly, though the effects are symmetric for both countries. On the other hand, global aggregate demand shocks, which are shocks not originating directly in the oil market, have nonlinear asymmetric effects on real exchange rate returns for Canada, Mexico, Norway and Russia, and nonlinear symmetric effects for Brazil and the UK.     

The effect of oil prices on stock prices: fresh evidence from asymmetric causality tests

This article investigates the causal impact of oil prices on stock prices in each G7 market as well as in the world market. An asymmetric causality test developed by Hatemi-J is used for this purpose. Since the underlying data appears to be non-normal with time-varying volatility, we use bootstrap simulations with leverage adjustments in order to produce more reliable critical values than the asymptotic ones. Based on symmetric causality tests, we find no causal effect of oil prices on the stock prices of the world market or any of the G7 countries. However, when we apply an asymmetric causality test, we find that increasing oil prices cause stock prices to rise in the world, the U.S. and Japan while decreasing oil prices cause stock prices to fall in Germany. This may imply that the world, the U.S. and Japanese stock markets consider increases in oil prices as an indicator of good news as this may mean that there is an increase in oil demand due to an expected growth in the economy while the German stock market treats decreasing oil prices as a signal of an expected contraction in the economy.     

Have food and financial markets integrated?

This article analyses comovements and discusses possibly greater market integration between aggregate food commodity and stock prices in the period 1990 to 2012. Return correlations, price return distributions, cointegration and Granger-causalities are tested in subsamples on monthly FAO Food Price Index and MSCI World Stock Market Index. Empirical results suggest that while there is only weak indication of greater comovements concurrent with structural changes such as changed agricultural policies, new demand due to growth in emerging markets and energy mandates and the financialization of food markets since the early 2000s, they did start to increase substantially in particular during the financial stress of the Lehman crisis and the Great Recession. While structural changes may have amplified price linkages across markets, results do not suggest that they are the key factors for greater price comovements. Instead, the effects of the late-2000s recession as a time of great economic weakness and uncertainty may have changed concurrently the behaviour of both food and financial market participants, such that different market prices exhibit large comovements.     

Resource Price,Macroeconomic Distortions,and Public Outlay: Evidence from Oil-Exporting Countries

This study examines the repercussions of oil price and macroeconomic distortions on government expenditure in 15 oil-exporting countries. Adapting the Pooled Mean Group analytical approach, the long-run findings are indicative of a blend of the Dutch disease and rent-seeking hypothesis of the resource curse theory in oil-exporting countries. These effects crucially impact on the poor growth of the real sector in these countries, needed for diversification of their revenue base. Furthermore, both resource curses account for one of the reasons why fiscal deficits in oil-exporting countries have been on the rise. The country short-run coefficient for the balance of payment, economic growth, and exchange rate also supports the Dutch disease and rent-seeking hypothesis mix found in the long run. Also, the significant negative impact of oil rents in most countries shows that oil-exporting countries have been making attempts at diversifying their income sources; this is because proceeds from oil cannot be relied upon to adequately finance growing government expenditure, due to the volatile nature of oil prices, thus suggesting also that the volatility hypothesis is valid for most oil-exporting countries in the short run.     

Time-varying synchronization of European stock markets

We study intraday comovements among three developed (France, Germany, and the United Kingdom) and three emerging (the Czech Republic, Hungary, and Poland) European stock markets. When applying a Dynamic Conditional Correlation GARCH model to 5- min tick intraday stock price data (2003–2006), we find a strong correlation between the German and French markets and also between these two markets and the UK stock market. However, very little systematic positive correlation during a trading day can be detected between the developed and emerging stock markets, or within the emerging group itself. Hungary exhibits higher correlation with the developing markets and the emerging markets and its dynamics show an increasing trend; Poland and the Czech Republic produce less clear-cut results.     

Return and volatility transmission between world oil prices and stock markets of the GCC countries

This paper investigates the return links and volatility transmission between oil and stock markets in the Gulf Cooperation Council (GCC) countries over the period 2005-2010. We employ a recent generalized VAR-GARCH approach which allows for transmissions in return and volatility. In addition, we analyze the optimal weights and hedge ratios for oil-stock portfolio holdings. On the whole, our results point to the existence of substantial return and volatility spillovers between world oil prices and GCC stock markets, and appear to be crucial for international portfolio management in the presence of oil price risk.     

International capital markets,oil producers and the Green Paradox

A rapidly rising carbon tax leads to faster extraction of fossil fuels and accelerates global warming. We analyze how general equilibrium effects operating through the international capital market affect this Green Paradox. In a two-region, two-period world with identical homothetic preferences and without investment, the global interest rate falls and the Green Paradox weakens. With investment or a relatively more impatient oil-importing region, the Green Paradox may be strengthened because the future oil demand function shifts downward or because the interest rate rises. If the oil-importing region is very much more patient than the oil-exporting region, the Green Paradox may be reversed but in our calibrated model the effects are tiny. With exploration and endogenous initial oil reserves, a future carbon tax lowers cumulative oil extraction in partial equilibrium. If the boost to current oil extraction is weakened, strengthened or reversed in general equilibrium, so is the fall in cumulative extraction. A partial and general equilibrium welfare analysis of a future carbon tax, both for full and partial exhaustion, is given. The effects of stock-dependent extraction costs are separately discussed in an Appendix.     

Energy price transmissions during extreme movements

This paper investigates price transmissions across European energy forward markets at distinct maturities during both normal times and extreme fluctuation periods. To this end, we rely on the traditional Granger causality test (in mean) and its multivariate extension in tail distribution developed by Candelon, Joëts, and Tokpavi (2013). Considering forward energy prices at 1, 10, 20, and 30 months, it turns out that no significant causality exists between markets at regular times whereas comovements are at play during extreme periods especially in bear markets. More precisely, energy prices comovements appear to be stronger at short horizons than at long horizons, testifying an eventual Samuelson mechanism in the maturity prices curve. Diversification strategies tend to be more efficient as maturity increases.     

A wavelet decomposition approach to crude oil price and exchange rate dependence

This paper studies the relationship between oil prices and US dollar exchange rates using wavelet multi-resolution analysis. We characterized the oil price–exchange rate relationship for different timescales in an attempt to disentangle the possible existence of contagion and interdependence during the global financial crisis and analyze possible lead and lag effects. For crude oil prices and a range of currencies, we show that oil prices and exchange rates were not dependent in the pre-crisis period; however, we did find evidence of contagion and negative dependence after the onset of the crisis. Additionally, we found that oil prices led exchange rates and vice versa in the crisis period but not in the pre-crisis period. These findings have important implications for risk management, monetary policies to control oil inflationary pressures and fiscal policy in oil-exporting countries.     

Stock market comovements in Central Europe: Evidence from the asymmetric DCC model

We examine time-varying stock market comovements in Central Europe employing the asymmetric dynamic conditional correlation multivariate GARCH model. Using daily data from 2001 to 2011, we find that the correlations among stock markets in Central Europe and between Central Europe vis-à-vis the euro area are strong. The correlations increased over time, particularly after their EU entry and largely remained at these levels during the financial crisis. The stock markets exhibit asymmetry in the conditional variances and to a certain extent in the conditional correlations as well, pointing to the importance of applying a sufficiently flexible econometric framework. The conditional variances and correlations are positively related, suggesting that the diversification benefits decrease disproportionally during volatile periods.     

Time‐Varying Spot and Futures Oil Price Dynamics

In this paper, we investigate the role of crude oil spot and futures prices in the process of price discovery by using daily data over the period from January 1992 to September 2012. We provide evidence that futures markets play a more important role than spot markets, but their relative contributions turn out to be highly unstable, especially for the most deferred contracts. Furthermore, considering the time‐varying dynamics provides evidence of a smaller role for futures markets and a greater role for fundamental factors in driving oil prices during the global financial turmoil of 2007–2008. The implications of the main results for hedging and forecasting crude oil spot prices are also discussed.     

Exchange Rates and Stock Prices in the MENA Countries: What Role for Oil?

This paper considers the linkage between stock prices and exchange rates in four MENA (Middle East and North Africa) emerging markets. In contrast to the existing evidence that uses a global market index to uncover such a relationship it is found that for the sample countries oil prices emerge as the dominant factor in the above relationship. The paper considers the presence of regime shifts and evidence is found of cointegration only for the period following the 1999 oil price shock. Readjustment towards equilibrium in each stock market occurs via oil price changes. Finally, a number of robustness checks are performed and persistence profiles produced.     

How do great shocks influence the correlation between oil and international stock markets?

We investigate the impacts of great shocks (2003 Iraq War and 2008 Financial Crisis) on the correlations between oil and US/China stock markets, utilizing a novel MADCC (mixed asymmetry dynamic conditional correlation) model. This model successfully captures the coexistence of opposite signed asymmetries. We find that great shocks indeed increased the correlations. Further, results from the news impact surfaces indicate that correlations between oil and stock markets are higher to joint negative shocks; however, correlation between stock markets has stronger response to joint positive shocks.