Oil-specific Demand Shocks Research Articles

Explaining the nonlinear response of stock markets to oil price shocks

This paper is set to reconcile the existent conflicting empirical evidence on the effect of oil prices on stock prices. We estimate various nonlinear models where the response changes according to a first-order Markov switching process. More importantly, we model the transition probabilities between the high- and low-response regimes to depend on state variables to allow us to explain the forces behind the asymmetry in the response. The results show statistically significant asymmetries that can be explained by economic recessions and to a lower extent depend on the magnitude of the oil price shift and on whether the shift is positive or negative. In the high response regime, the effect is positive and lasts longer. We also find evidence of asymmetries in the response of stock prices to crude oil supply shocks, global aggregate demand shocks, and oil-specific demand shocks.

What Matters for Consumer Sentiment? World Oil Price or Retail Gasoline Price?

This paper examines the impact of oil supply and demand shocks on gasoline prices and consumer sentiment in the Euro Area. Results reveal that aggregate consumer sentiment and its components deteriorate notably as a response to positive shocks to real gasoline prices. On the contrary, positive oil-specific demand shocks do not trigger a deterioration of consumer sentiment. In other words, consumer sentiment is affected primarily by unexpected changes in gasoline prices at the pump rather than unexpected changes in crude oil prices. The analysis is further refined to analyze the effects of these shocks to six sub-components of consumer sentiment.

Oil shocks, competition, and corporate investment: Evidence from China

Abstract This paper aims to investigate the impact of three classical oil shocks on the Chinese corporate investment by using firm-level data. Moreover, we assess the role of product market competition in the relationship between oil shocks and corporate investment. Our empirical results show that oil aggregate demand and specific demand shocks negatively affect corporate investment, while oil supply shocks show a positive effect. Notably, compared to the non-energy-related industry, the corporate investment of energy-related industry is more sensitive to these oil shocks. Furthermore, we find high competitive pressure can mitigate the impact of oil specific demand shocks on the corporate investment of energy-related industry, but competition presents a limited effect on the relationship between other oil shocks and corporate investment.

The Response of US Macroeconomic Aggregates to Price Shocks in Crude Oil vs. Natural Gas

Price fluctuations in crude oil and natural gas, as important sources of energy, have a remarkable influence on our economies and daily lives. Therefore, it is extremely important to react appropriately and to formulate appropriate policies or strategies to reduce the expected negative effects of fluctuations. However, as Kilian suggested, not all oil price shocks are similar; price increases can have diverse impacts on the real price of oil, depending on the underlying determinants of the price fluctuation. Therefore, economists, policymakers, and investors need to decompose real price shocks and evaluate the responses of macroeconomic aggregates to different types of shocks. In this study, we investigate and compare the different effects crude oil and natural gas price shocks have on US real GDP and CPI levels, utilizing a two-stage method based on a structural vector autoregression (SVAR) model proposed by Kilian. We found that a crude oil specific demand shock made larger contributions to the real price of oil than a natural gas specific demand shock did to the real price of gas, and that specific demand shocks in crude oil and natural gas markets had different effects on US CPI inflation and had similar effects on the real US GDP level.

Time-varying effect of oil price shocks on the stock market returns: Evidence from oil-importing and oil-exporting countries

This paper performs a two-stage methodology based on the Structural VAR and time-varying parameter regression models to examine the dynamic reaction of a set of oil-related countries’ stock markets to oil price shocks. Oil prices are studied by disentangling demand and supply shocks. Based on monthly data from the 1999–2018 period, the results report evidence of a time-varying reaction of all stock market returns to different oil shocks. Moreover, the stock returns react to the demand shocks more than to the supply shocks. Besides, the effect of supply shocks on stock returns is generally limited and negative, while the aggregate demand shocks exert a positive effect on almost all stock returns. Oil-specific demand shocks have positive effects on the oil-exporting stock returns and negative effects in the case of oil-importing countries, except for the Chinese market. These findings have important policy implications for policymakers and investors.

Analyzing dynamic impacts of different oil shocks on oil price

This paper constructs a five-variable time-varying vector autoregressive model based on oil price, oil aggregate supply, oil aggregate demand, global oil inventory, and speculative demand. This model is used to study the dynamic impacts of different oil shocks on oil price from 2002 to 2018, focusing on how different oil shocks affect oil price fluctuation over time. Empirical results show that each type of oil shocks has significantly time-varying characteristics and the impact strength is the greatest under the one-stage lag (i.e. one month), and the impact effect almost disappears around the fifth period. Also, the impacts of important event shocks on oil price volatility are tremendous and have a serious negative impact on the global economy. In addition to the oil specific demand shock (i.e. oil price itself), the dominant factor in oil price after the financial crisis is global oil inventory. Finally, this paper provides some policy suggestions based on the findings.

How do oil price shocks affect the output volatility of the U.S. energy mining industry? The roles of structural oil price shocks

Abstract This paper focuses on how explicit structural shocks that characterize the endogenous character of international oil price change affect the output volatility of the U.S. crude oil and natural gas mining industries. To this end, we employ a modified structural vector autoregressive model (SVAR) to decompose real oil-price changes into four components: U.S. supply shocks, non-U.S. supply shocks, aggregate demand shocks, and oil-specific demand shocks mainly driven by precautionary demand. The results indicate that output volatility of the U.S. crude oil and natural gas mining industry has significantly negative responses to U.S. supply shocks, aggregate demand shocks, and oil-specific demand shocks, while lacks significant response to non-U.S. supply shocks. Variance decomposition and historical decomposition confirm that U.S. supply shocks occupy most explaining variations in output volatility among the four structural oil shocks. Moreover, the oil-specific demand shocks explain more variation than that of aggregate demand shocks for the crude oil mining industry, but the opposite is true for the natural gas mining industry.

Dynamic structural impacts of oil shocks on exchange rates: lessons to learn

This study explores the dynamic effects of different oil shocks on real exchange rates in net oil importers and exporters. Specifically, the connectedness measures are combined with the structural vector autoregressive model. The findings show that oil supply shocks have a larger depreciating influence on exchange rates in oil exporters than in importers. All countries are generally more sensitive to oil-specific demand shocks, and this sensitivity can lead to a significant appreciation in real exchange rates, except in Japan and the United Kingdom. Further, the spillover effect between oil shocks and exchange rates has strengthened after the global financial crisis of 2007–08. Our findings provide useful implications for the policy-makers and market risk managers to effectively avoid exchange rate risk induced by oil shocks.

The impact of oil price shocks on clean energy stocks: Fresh evidence from multi-scale perspective

We use the wavelet-based quantile-on-quantile and Granger causality-in-quantiles methods to document the impact of exogenous oil price structural shocks on clean energy stocks. We find that the effects vary across quantiles and investment horizons and are asymmetric at higher quantiles of oil shocks in the long run. As for the oil supply shock, the impact on clean energy in the short and long term is strong. Furthermore, it is observed that in the middle term, the effects of the oil aggregate demand shocks are quite positive at higher and lower quantiles of clean energy stocks. In the long run, the impact of the oil specific demand shocks on stocks is asymmetric at the higher quantiles (bullish) of the stock market. In addition, the trend of Granger causal relationship in both the mean and the variance is quite similar from lower quantiles to higher quantiles and we find the evidence of strong predictability of the oil price shocks for the stocks in the long run.

The pass-through effects of oil price shocks on China's inflation: A time-varying analysis

Abstract Using a time-varying parameter structural vector autoregression with stochastic volatility (TVP-SVAR-SV) model, we decompose the structural shocks of oil price fluctuations into four types: oil supply shocks, global demand shocks, domestic demand shocks and oil-specific demand shocks. We then analyze the time-varying effects of these oil price shocks on China's inflation at the import, production and consumption stages using monthly data from January 1999 to December 2016. The results show that the pass-through effects of the four types of oil price shocks on China's inflation at each stage are time-varying and that there are significant differences at different time horizons and points in time. The analysis of the variance decomposition shows that the effects of oil price shocks on China's inflation at each stage are incomplete and decrease along the price chain. The increase in oil prices driven by oil-specific demand shocks is the most important cause of China's inflation at the import and production stages during the full sample period, while China's inflation at the consumption stage is mainly affected by domestic demand shocks. In addition, the inflationary effects of oil price shocks have been dramatically weaker since the international financial crisis compared with before the crisis.

Explaining the Nonlinear Response of Stock Markets to Oil Price Shocks

This paper is set to reconcile the existent conflicting empirical evidence on the effect of oil prices on stock prices. We estimate various nonlinear models where the response changes according to a first-order Markov switching process. More importantly, we model the transition probabilities between the high- and low-response regimes to depend on state variables to allow us to explain the forces behind the asymmetry in the response. The results show statistically significant asymmetries that can be explained by economic recessions and to a lower extent depend on the magnitude of the oil price shift and on whether the shift is positive or negative. In the high response regime, the effect is positive and lasts longer. We also find evidence of asymmetries in the response of stock prices to crude oil supply shocks, global aggregate demand shocks, and oil-specific demand shocks.

Distinguishing the Effect of Oil Shocks on the Global Economy: A Threshold Regression Approach

The effect of oil shock on the global economy is evident through many studies. However, the effect is heterogeneous over time. One of the reasons that lead to such different impacts is due to the oil source that is either the oil shock is demand or supply-driven. Applying the structural vector autoregressive (SVAR) model to generate the three oil shocks based on the three oil sources (oil supply, oil demand and oil specific-demand), we extended the examination on the effect of oil shock on the global economy using the threshold regression. Our results reveal the threshold effects of oil directly and indirectly on the global economy. The impacts of oil shocks differ across sectors, implying oil intensity, as well as oil sources, are the factors that determine the impact of oil shocks on the global economy. Overall, the oil specific-demand shock is more influential among the three oil shocks. Hence, the global economy is oil demand-driven. Besides that, the impact of oil is relatively large in the energy sector when compared to the non-energysector and precious metals industry. Despite that, the impact of oil shocks is small if compared to the non-oil shocks such as exchange rate changes and global consumer price inflation shock. Consequently, non-oil shocks are the main determinants of the global economic fluctuation. The study leads to a better understanding of the transmission of oil shock and its sources, the interaction between oil and economic indicators and the policy implication due to oil dependency/ intensity.

The Effects of Different Types of Oil Price Shocks on Industrial PPI: Evidence from 36 Sub-industries in China

ABSTRACT Based on a structural vector autoregression (SVAR) model, we investigate the impacts of different types of oil price shocks on industrial producer price index (PPI) in China for the period from 1996:10 to 2017:6. The results show that an increase in oil prices caused by oil supply shocks has negative impacts on China’s industrial PPI, while industrial PPI and an increase in oil prices caused by aggregate demand and oil-specific demand shocks move in the same direction. There are significant inter-industry differences in the effect of oil price shocks on industrial PPI. Energy intensity is an important factor affecting the inter-industry differences in oil supply and oil-specific demand shocks, while the inter-industry differences in aggregate demand shocks are mainly affected by export dependence. A variance decomposition analysis reveals that the increase in oil prices driven by aggregate demand shocks has the most important influence on the PPIs in most sub-industries.

Asymmetric oil prices and trade imbalances: Does the source of the oil shock matter?

We examine the asymmetric effects of oil supply shocks, shocks to global real economic activity, and oil-specific demand shocks on the oil, non-oil and overall trade balances of a large sample of oil exporters and oil importers. Our empirical strategy accounts for endogenous oil prices, heterogeneous parameters, and error cross section dependence within a panel framework. We find that the pattern of asymmetries in the oil price-trade balance relationship depends on the source of the shock. For both oil exporters and oil importers, oil supply expansions are more important than oil supply disruptions; we discuss the role that Saudi Arabia plays in limiting the global effects of oil supply disruptions. Although increases in global demand deteriorate trade balances for oil importers and improve them for oil exporters, decreases in global demand have a similar, rather than an opposite effect. Our results corroborate the existing evidence that oil price increases only generate large global imbalances if they result from demand-side shocks; and we present new evidence that oil price decreases only benefit oil importers if they result from supply-side shocks.

The source of real oil price fluctuations: a fresh view from the frequency domain

ABSTRACT This paper analyzes the role of different types of oil price shocks for real oil price fluctuations and contributes by exploiting insights from the frequency domain perspective. We find aggregate demand shocks are the most important contributor to real oil price fluctuations in the entire spectrum. Besides, oil-specific demand shocks have a relatively important impact on real oil price changes at high frequencies and business cycle frequencies, while oil supply shocks have a relatively important impact on real oil price changes at low frequencies and frequency zero.

Energy shocks pricing model: A non-linear US sectoral based analysis

Traditional asset pricing models have extensively been used; however, determining asset pricing in isolation in the current global environment demands for the inclusion of certain extraneous events. The goal of this study is to measure the impact of disintegrated structural oil shocks, proposed by Kilian (2009) on disaggregated US sectoral returns. Our work is motivated by the influence of global oil shocks on asset returns that are widely documented in the literature. Equity pricing data for nine major US sectors is used on monthly frequency. We apply non-linear Markov Regime Switching framework and report clear regime differences across all sectors. Commonality in behavior for majority of the sectoral returns is observed however consumer discretionary, materials and automobile sector remains sensitive in both regimes contrary to other sectors exhibiting sensitivity in one regime or the other. Results also present robust evidence of oil specific demand shocks implying more uncertainty for US sectoral returns with important investment and policy implication.

Dynamic link between oil prices and exchange rates: A non-linear approach

We explore the non-linear relationship between crude oil prices and exchange rates of major currencies from quantitative and structural perspectives, by utilizing bivariate normal mixture model. The correlation coefficients between oil prices and exchange rates demonstrate that their dependences typically start from 2004 then dynamically change over time. Then we investigate whether business cycle and oil price shocks as two possible exogenous factors affect the dependence structure of oil-FX linkage. We find significant structural heterogeneity during economic expansion while little evidence of heterogeneity in recession. This finding provides alternative interpretations for the enhanced dependence between oil prices and exchange rates and generates implications of financialization in commodity market. In terms of oil price shocks (Kilian, 2009), the normal mixture model captures significant heterogeneity, implying that unstable oil-FX dependence structure is frequently associated with oil aggregate demand shocks and oil-specific demand shocks. With an emphasis on the dynamic weights of two underlying states, we interestingly find that structural heterogeneities coincide with a variety of geopolitical and economic events. The application of normal mixture not only provide us knowledge of non-linear relationship between oil prices and exchange rates but also guidance for investors in risk management and portfolio diversification complementary to the traditional portfolio theory based on normal distribution.

How do consumers assess the macroeconomic effects of oil price fluctuations? Evidence from U.S. survey data

We use survey data to study how consumers assess the macroeconomic effects of oil market shocks on the U.S. economy using a vector autoregressive model. To structurally decompose oil price changes into oil supply shocks, oil-specific demand shocks, and global business cycle shocks, we impose zero and sign restrictions, as well as elasticity bounds. We find that survey-based measures of inflation and unemployment expectations increase in response to shocks that result in higher oil prices, where revisions in unemployment expectations are less pronounced in response to oil-specific demand shocks and global business cycle shocks. We also find that our measure of interest rate expectations increases in response to global business cycle shocks and, temporarily, in response to oil-specific demand shocks. Following oil supply shocks, however, interest rate expectations decline. Overall, the responses of the expectation measures are consistent with the actual developments.

The effects of oil price shocks on the prices of EU emission trading system and European stock returns

This paper examines whether oil price shocks of different origin affect the price of carbon emission allowance traded under the European Union's Emissions Trading System; leading to changes in aggregate and sector-specific European equity returns. The results show that an unexpected oil-supply disruption has an imminent but weak positive effect on carbon emission price, while a positive aggregate demand shock has a strong positive effect on carbon emission price. By contrast, a positive oil-specific (precautionary) demand shock has a negative but weak effect on carbon emission price. These findings are economically important as positive shocks on the emission allowance price trigger a decrease on the aggregate stock return of the European equity market, albeit they trigger a large and persistent increase on European equity returns of oil-related industries with the exception of the Energy sector.

Oil price shocks, economic policy uncertainty and China’s trade: A quantitative structural analysis

This article studies the effects of oil price shocks and economic policy uncertainty on China’s trade. We find oil supply and economic policy uncertainty shocks can significantly decrease China’s real export while oil aggregate demand and oil specific demand shocks can significantly increase the real export. Meanwhile, oil supply and oil aggregate demand shocks can significantly increase China’s real import. In addition, oil aggregate demand and oil specific demand shocks can significantly decrease the Chinese trade terms, whereas economic policy uncertainty shocks can significantly increase the terms of trade. We also detect that economic policy uncertainty shocks play the most important role in accounting for the variance of real export, import and terms of trade. Finally, we uncover that the sharp decrease in China’s trade during the period 2008Q4-2009Q3 can be largely explained by shocks in the world oil market, while the decrease in China’s trade in the period 2014Q4-2016Q1 is mainly driven by global economic policy uncertainty shocks.