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.