Abstract
The relationship between oil price and investor sentiment is crucial to economic activity. Disentangling the shocks in crude oil price by structural VAR model, this paper analyzes the interaction between oil price shocks and investor sentiment by linear and nonlinear causality approach, TVP-VAR mode and NARDL model. The results reveal that changes of oil-specific demand shock not only linearly but also nonlinearly cause changes of investor sentiment while there is no significant link between other oil shocks (oil supply shock and aggregate demand shock) and investor sentiment. In addition, the study discovers that the oil-specific demand shock generally positively affects investor sentiment over time, and it has positive and asymmetric effects on investor sentiment in the short-run. In other words, it is the negative oil-specific demand shock rather than the positive component that has the significant impact on investor sentiment for short-run. This study could enrich current theories on the interaction between oil price and investor sentiment and serve as a supplement to current literature.
Highlights
Crude oil is a core source of energy for the global economy and essential for economic activity
The findings indicate that the oil supply and aggregate demand shock are not related to investor sentiment, but changes in the oil-specific demand that are more related to unexpected and precaution demand can cause investor sentiment fluctuated
There exists a significant linear nonlinear Granger cause from oil-specific demand shock to investor sentiment while causalities cannot be found among other variables, indicating only the changes of oil-specific demand shock can lead to the changes of investor sentiment
Summary
Crude oil is a core source of energy for the global economy and essential for economic activity. With the development of investments [12,13,14], investor sentiment has become a newly emerging concept, which is greatly different with these traditional fundamental factors, attracts significant attention in the crude oil market. An increasing number of scholars have been studying the relationship between crude oil price and investor sentiment. These studies are performed generally from two perspectives.
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