Dynamic relationship of oil price shocks and country risks

Abstract

This study investigates the dynamic relationship between oil price shocks and country risks using a Structural VAR framework for a sample of both net oil-exporting and net oil-importing countries over the period January 1994–December 2014. The results reveal that country risk is significantly affected by oil price shocks, but the impacts are different. Unanticipated positive oil price shocks trigger a reduction (addition) in country risk for net oil-exporting country (net oil-importing countries). As to the responses of oil prices to country risk shock, evidence show that country risk shocks have a delayed significantly positive impacts on oil price for oil-exporting country. With respect to the effects of subcomponents of country risk, we find evidence that economic and political risk have a significant impact on supply-side shocks in net oil-exporting countries like Canada, while economic and political risk have a significant effect on supply-side shocks and oil specific demand shocks in net oil-importing countries like the US. These results are particularly important to policy makers and government.