The asymmetric impact of oil market shocks on the time-varying connectedness and spillover of financial stress

Abstract

ABSTRACT Applying a novel time-varying parameter VAR (TVP-VAR) extended joint connectedness approach this study first examines the connectedness and spillover of financial stress among twelve large Asian economies. The finding shows that the usually high connectedness of the financial stress among these economies was further elevated during the Asian financial crisis and global financial crisis but not significantly during COVID-19 pandemic. The direction of spillover depends on the level of economic development. Developed economies such as South Korea, Singapore and Hong Kong are significantly net transmitters of financial stress to other Asian economies whereas countries such as Pakistan and Indonesia are significantly net receivers. Applying linear and non-linear Markov-switching models this study further examines the impact of oil-supply, and consumption- and speculation-led oil-demand shocks on the dynamic connectedness of financial stress indexes. In the linear model only a speculation-led increase in demand for oil increases the connectedness. However, the Markov-switching model reveals that in the high-volatility regime all types of oil shocks influence the connectedness of the financial stress among these economies. This emphasizes the elevated role of oil market in transmitting financial stress across economies during the time of economic turmoil.