Abstract
Oil price shocks harm real output and bank and industrial profit in most oil-importing countries, which has motivated us to investigate the impact of these shocks on the equity performance of banking industries. To fulfill the research objectives, we involve a sample of developed and emerging economies for comparison purposes. The objective of employing the Toda and Yamamoto (Journal of econometrics, 1995, 66 (1), 225–250) causality test is to explore the time-variant relationship between oil prices and banking indices to investigate how oil price shocks affect the performance of country-specific banking industries. In addition, an impulse response function and variance decomposition analysis are utilized to, respectively, examine the time-variant relationship between oil price shocks and macroeconomic factors and the performance of the banking sector. Results vary across different economies in our sample, but the magnitude of oil price impact is relatively significant in the US, the UK, Canada, Japan, Mexico, and Brazil. The findings indicate that oil price rises adversely affect equity bank indices in developed and emerging economics except for Mexico. Notably, our findings show that oil prices and interest rates jointly have significant power in explaining the banking equity variation and suggest that international bank portfolio investors should consider hedging oil price risk.
Highlights
The business connection between the equity market, especially for the banking sector and oil industries, has placed commercial banks in a vulnerable position when facing oil price shocks
It is noteworthy that Mexico and Brazil have experienced a period when the interest rate is high in the early stage of the timespan between 1995 and 2021
We attempt to explore the dynamic relationship between oil price shocks, macroeconomic changes, and banking sector performance utilizing a dataset from February 1995 to March 2021
Summary
The business connection between the equity market, especially for the banking sector and oil industries, has placed commercial banks in a vulnerable position when facing oil price shocks. Energy and Financial Market Interactions adjustment, which transmits the impact on the banking industry These economic phenomena drive our motivation to explore the time-variant relationship between macroeconomic fluctuation, oil price return, and the performance of the banking industry. New investment projects, and their ability to adjust their liquidity positions via wholesale funding market This investigation is motivated by Hesse and Poghosyan (2016) who explored the dynamic relationship between oil price shocks and banking industry performance proxied by banking indices. We include WTI, Brent and Dubai oil price, macroeconomic factors consisting of industry production, interest rates, and CPI, and banking indices to analyze the time-variant relationship between oil price shocks and country-specific banking industry performance in the US, the UK, Canada, Japan, Mexico, Malaysia, and Brazil.
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