Abstract
PurposeThe crude oil market has experienced an unprecedented overreaction in the first half of the pandemic year 2020. This study aims to show the performance of the global crude oil market amid Covid-19 and spillover relations with other asset classes.Design/methodology/approachThe authors employ various pandemic outbreak indicators to show the overreaction of the crude oil market due to Covid-19 infection. The analysis also presents market connectedness and spillover relations between the crude oil market and other asset classes.FindingsOne of the essential findings the authors report is that the crude oil market remains more responsive to pandemic fake news. The shock of the global pandemic panic index and pandemic sentiment index appears to be more promising. It has also been noticed that the energy trader's sentiment (OVX and OIV) was measured at a too high level within the Covid-19 outbreak. Volatility spillover analysis shows that crude oil and other market are closely connected, and the total connectedness index directs on average 35% contribution from spillover. During the initial growth of the infection, other macroeconomic and political events remained to favor the market. The second phase amidst the pandemic outbreak harms the global crude oil market. The authors find that infectious diseases increase investor panic and anxiety.Practical implicationsThe crude oil investors' sentiment index OVX indicates fear and panic due to infectious diseases and lack of hedge funds to protect energy investments. The unparalleled overreaction of the investors gauged in OVX indicates market participants have paid an excessive put option (protection) premium over the contagious outbreak of the infectious disease.Originality/valueThe empirical model and result reported amid Covid-19 are novel in terms of employing a news-based index of the pandemic, which are based on the content analysis and text search using natural processing language with the aid of computer algorithms.
Highlights
The crude oil market has experienced an unprecedented overreaction in the first half of the pandemic year 2020, and the dynamic of the global crude oil has significantly transformed over the past decade
We present analysis in two phases, Phase I (2020Q1) is the initial stage of the pandemic outbreak started from the Wuhan city of China, and it spread across the globe
The global benchmark of crude oil West Texas Intermediate (WTI) and Brent has perceived an unprecedented overreaction during the first quarter of the pandemic year 2020
Summary
The crude oil market has experienced an unprecedented overreaction in the first half of the pandemic year 2020, and the dynamic of the global crude oil has significantly transformed over the past decade. Since the past one-decade energy market is no longer demand-driven, the market turned into supply-driven. Following the recent tail events, crude oil is struggling and finding the best global price. The pandemic outbreak Covid-19 has disrupted the global supply chain, and the contraction of the energy demand has caused. Published in European Journal of Management and Business Economics. The full terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/ legalcode
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