Role Of Oil Price Shocks Research Articles

Resource curse in OPEC with varied levels of financial regulations and constraints: The role of oil price shocks and digital finance

Economic growth and development are crucial for global economies, and a nation's physical, human, and natural resources significantly impact its trajectory. Natural resource-rich nations can benefit or face the resource curse. Henceforth, this study examines the economic growth of Organization of the Petroleum Exporting Countries (OPEC), considering digital finance, financial regulations, and oil price shocks. Understanding the intricate relationship between oil price fluctuations and digital finance within diverse financial regulatory frameworks is essential for a comprehensive grasp of the resource curse in OPEC. The research employed a bias-corrected dynamic panel and MMQR model to analyze datasets from 2004 to 2022. The study reveals that Oil price shocks have led to higher economic growth when there are moderate financial constraints. However, they have a detrimental effect when the financial system is either very constrained or highly unconstrained. Digital finance has been shown to enhance Gross Domestic Product (GDP) across various levels of financial regulations. The GDP of OPEC experiences a significant adverse effect when digital finance and oil price shocks are coupled, particularly in the presence of stringent financial rules. This outcome is mainly attributed to the adverse influence of oil prices. The findings above underscore the need for moderate levels of financial regulations that support the favorable influence of oil prices and digital finance on GDP. The study additionally suggests a prospective strategy for enhancing GDP growth in OPEC nations: facilitating digital finance.

Volatility spillover between oil prices and main exchange rates: Evidence from a DCC-GARCH-connectedness approach

This paper investigates the co-movements of oil prices and the exchange rates of 10 top oil-importing and oil-exporting countries. First, we estimated the total static spillover index based on vector autoregressive (VAR) models. Second, we adopted the recent DCC-GARCH-CONNECTEDNESS approach proposed by Gabauer (2020) to conduct a time-varying analysis that investigates the directionally dynamic connectedness among WTI and Shanghai crude oil futures and currency markets. We explored contagion spillover volatility by focusing on a sample of major oil-exporting and oil-importing countries using daily data from 4 March 2018 to 25 August 2023. We analysed this relationship during four phases: the entire sample; before COVID-19; during COVID-19; and during the Russian‒Ukrainian war. Our results confirm the persistence of volatility for the series studied, thereby justifying the use of the dynamic connectedness approach. Our findings also reveal strong evidence of volatility transmission between oil prices and exchange-rate markets. However, the COVID-19 pandemic and the Russian‒Ukrainian war have altered this link. The connectedness between the two markets (petrol and exchange) was stronger at the beginning of the crisis period and then gradually depreciated in value over time. Our findings reveal that exchange rates for both oil-exporting and oil-importing countries are more sensitive to oil price shocks during crises than in normal periods. This suggests that volatility contagion between these two markets continues to exist, thus emphasising the role of oil price shocks as net transmitters across the network during extreme scenarios.

Vulnerability of sustainable markets to fossil energy shocks

From a market efficiency perspective, this study investigates the performance of sustainable markets under oil price shocks, including green bonds, clean energy, and carbon futures markets. This study assesses the one-way Granger causal impact caused by oil price shocks on the efficiency of sustainable markets, revealing that sustainable markets are vulnerable to oil price shocks initially. Our quantile-based regression results indicate that all three types of oil price shocks could have a long-term adverse effect on the effectiveness of these markets, confirming that sustainable markets are highly susceptible to oil price shocks. For each of these sustainable market efficiency, the primary role of oil price shocks varies. Additionally, the intensity and direction of the effects of these oil shocks can also be confused by the time dimension and quantile level. Our analysis shows that there is still a need for enhancement in the risk resistance of sustainable markets to fossil energy shocks. The findings could inform stakeholders’ investment strategies or policy arrangements in more detail and in more aspects.

The role of oil price shocks on exchange rates for the selected Asian countries: Asymmetric evidence from nonlinear ARDL and generalized IRFs approaches

The primary contribution of the current paper is to explicitly take into consideration the role of asymmetries in oil prices when studying the nexus between oil price shocks and the real exchange rates across the selected countries in three regions of Asia. To achieve this contribution, the nonlinear autoregressive distributed lag (NARDL) and generalized impulse response functions (GIRFs) approaches are used. Our NARDL approach discovers that oil prices asymmetrically influence the currencies in such selected Asian economies as Bangladesh, China, India, Korea, the Philippines, and Thailand in both the short and long run. Our GIRFs reveal that a positive shock is more important than a negative shock in determining the currencies of the selected Asian countries. We believe that these outcomes have profound implications for our empirical modeling and policy analysis.

The Role of Oil Price Shocks on Exchange Rates for 13 Asian Countries Asymmetric Evidence from Nonlinear ARDL and Generalized IRFs Approaches

The Role of Oil Price Shocks on Exchange Rates for 13 Asian Countries Asymmetric Evidence from Nonlinear ARDL and Generalized IRFs Approaches

THE EFFECTS OF OIL PRICES ON MACROECONOMIC VARIABLES: EVIDENCE FROM AZERBAIJAN

This study investigates the impact of oil prices on economic growth, export, inflation and exchange rate in Azerbaijan, employing Johansen cointegration and VECM methods to the data spanning from January, 2005 to January, 2019. The results from the Johansen cointegration method confirm the presence of a long-run relationship among the variables. Estimation results impulse-response and variance decomposition tests reveal that there is a positive and statistically significant impact of oil prices on economic growth, export and inflation for the Azerbaijani case. On the other hand, we find that oil prices have a negative impact on exchange rate. The results of this article will suggest to researchers and policy makers to comprehend the role of oil price shocks on economy in the case of Azerbaijan and other developing oil-rich countries.

Oil price shocks and the equity market: Evidence for the S&P 500 sectoral indices

Using monthly returns of ten S&P 500 sectoral indices from January 1990 to January 2015, I examine the impact of demand and supply shocks of oil on the stock market. I confirm that positive shocks to U.S. production of oil and economic activity have a significant and positive influence on stock returns. Moreover, the negative and persistent effect of real oil price shocks on all sectoral indices except energy and utility found by this study. I also examine the impact of oil price volatility on stock returns. Oil price volatility has a negative and significant effect on all industries, even oil-related and oil substitutes. In addition, I get the VAR estimations for the crisis period and find that there is a substantial increase in the role of oil price shocks in the decomposition of stock returns of all sectors. Furthermore, stock returns are better explained by U.S. oil production shocks than other shocks in most sectors over the financial crisis time period. In addition, I find the asymmetric effects of oil shocks are applicable to only two out of ten sectors, implying the effect of oil price return on equity returns only in the energy and utility sectors are not asymmetric.

Oil Price Shocks and the Equity Market: Evidence for the S&P 500 Sectoral Indices

Using monthly returns of ten S&P 500 sectoral indices from January 1990 to January 2015, we examine the impact of demand and supply shocks of oil on the stock market. We confirm that positive shocks to U.S. production of oil and economic activity have a significant and positive influence on stock returns. Moreover, the negative and persistent effect of real oil price shocks on all sectoral indices except energy and utility found by this study. We also examine the impact of oil price volatility on stock returns. Oil price volatility has a negative and significant effect on all industries, even oil-related and oil substitutes. In addition, we get the VAR estimations for the crisis period and find that there is a substantial increase in the role of oil price shocks in the decomposition of stock returns of all sectors. Furthermore, stock returns are better explained by U.S. oil production shocks than other shocks in most sectors over the financial crisis time period. In addition, we find the asymmetric effects of oil shocks are applicable to only two out of ten sectors, implying the effect of oil price return on equity returns only in the energy and utility sectors are not asymmetric.

Oil shocks and volatility jumps

In this paper, we analyse the role of oil price shocks, derived from expectations of consumers, economists, financial market, and policymakers, in predicting volatility jumps in the S&P500 over the monthly period of 1988:01–2015:02, with the jumps having been computed based on daily data over the same period. Standard linear Granger causality tests fail to detect any evidence of oil shocks causing volatility jumps. But given strong evidence of nonlinearity and structural breaks between jumps and oil shocks, we next employed a nonparametric causality-in-quantiles test, as the linear model is misspecified. Using this data-driven robust approach, we were able to detect overwhelming evidence of oil shocks predicting volatility jumps in the S&P500 over its entire conditional distribution, with the strongest effect observed at the lowest considered conditional quantile. Interestingly, the predictive ability of the four oil shocks on volatility jumps is found to be both qualitatively and quantitatively similar.

Volatility forecasting across tanker freight rates: The role of oil price shocks

This paper examines whether the inclusion of oil price shocks of different origin as exogenous variables in a wide set of GARCH-X models improves the accuracy of their volatility forecasts for spot and 1-year time-charter tanker freight rates. Kilian’s (2009) oil price shocks of different origin enter GARCH-X models which, among other stylized facts of the tanker freight rates examined, take into account the presence of asymmetric and long-memory effects. The results reveal that the inclusion of aggregate oil demand and oil-specific (precautionary) demand shocks improves significantly the accuracy of the volatility forecasts drawn.

Volatility Forecasting Across Tanker Freight Rates: The Role of Oil Price Shocks

This paper examines whether the inclusion of oil price shocks of different origin as exogenous variables in a wide set of GARCH-X models improves the accuracy of their volatility forecasts for spot and 1-year time-charter tanker freight rates. Kilian’s (2009) oil price shocks of different origin enter GARCH-X models which, among other stylized facts of the tanker freight rates examined, take into account the presence of asymmetric and long-memory effects. The results reveal that the inclusion of aggregate oil demand and oil-specific (precautionary) demand shocks improves significantly the accuracy of the volatility forecasts drawn.

The Role of Oil Price Shocks in Causing U.S. Recessions

AbstractAlthough oil price shocks have long been viewed as one of the leading candidates for explaining U.S. recessions, surprisingly little is known about the extent to which oil price shocks explain recessions. We provide a formal analysis of this question with special attention to the possible role of net oil price increases in amplifying the transmission of oil price shocks. We quantify the conditional effect of oil price shocks in the net oil price increase model for all episodes of net oil price increases since the mid‐1970s, analyze its determinants, and show that the linear model fits the data better.

The Impact of Oil Price on South African GDP Growth: A Bayesian Markov Switching‐VAR Analysis

AbstractOne characteristic of many macroeconomic and financial time series is their asymmetric behaviour during different phases of a business cycle. Oil price shocks have been amongst those economic variables that have been identified in theoretical and empirical literature to predict phases of business cycles. However, the role of oil price shocks to determine business cycle fluctuations has received less attention in emerging and developing economies. The aim of this study is to investigate the role of oil price shocks in predicting phases of the South African business cycle associated with higher and lower growth regimes. By adopting a regime dependent analysis, we investigate the impact of oil price shocks under two phases of the business cycle, namely high and low growth regimes. As a net importer of oil, South Africa is expected to be vulnerable to oil price shocks irrespective of the phase of the business cycle. Using a Bayesian Markov switching vector autoregressive (MS‐VAR) model and data for the period 1960Q2 to 2013Q3, we found the oil price to have predictive content for real output growth under the low growth regime. The results also show the low growth state to be shorter‐lived compared to the higher growth state.

Oil prices and real estate investment trusts (REITs): Gradual-shift causality and volatility transmission analysis

According to literature, oil price shocks and volatility can have sector-specific impacts in the market. While these studies include most asset groups, the dynamic relationship between the oil market and Real Estate Investment Trusts (REITs) has not been tested. This study examines the role of oil price shocks and volatility on six REIT categories: Residential, Hotel, Healthcare, Retail, Mortgage and Warehouse/Industrial REITs for the January 2005–December 2013 period. In addition, a new causality approach is proposed by augmenting the Toda–Yamamoto method with a Fourier approximation. This approach is capable of capturing gradual or smooth shifts and does not require a prior knowledge regarding the number, dates, and form of structural breaks. The so-called Fourier Toda–Yamamoto causality (mean spillover) test finds uni-directional causality running from oil prices to all REITs, except for the mortgage REITs. In the latter case, the causality is reversed. In addition, the relatively new and simple causality-in-variance test shows that there is bi-directional volatility transmission between the oil market and all REITs. Our results have important implications for REIT managers and investors.

The Role of Oil Price Shocks in Causing U.S. Recessions

Although oil price shocks have long been viewed as one of the leading candidates for explaining U.S. recessions, surprisingly little is known about the extent to which oil price shocks explain recessions. We provide the first formal analysis of this question with special attention to the possible role of net oil price increases in amplifying the transmission of oil price shocks. We quantify the conditional recessionary effect of oil price shocks in the net oil price increase model for all episodes of net oil price increases since the mid-1970s. Compared to the linear model, the cumulative effect of oil price shocks over course of the next two years is much larger in the net oil price increase model. For example, oil price shocks explain a 3% cumulative reduction in U.S. real GDP in the late 1970s and early 1980s and a 5% cumulative reduction during the financial crisis. An obvious concern is that some of these estimates are an artifact of net oil price increases being correlated with other variables that explain recessions. We show that the explanatory power of oil price shocks largely persists even after augmenting the nonlinear model with a measure of credit supply conditions, of the monetary policy stance and of consumer confidence. There is evidence, however, that the conditional fit of the net oil price increase model is worse on average than the fit of the corresponding linear model, suggesting much smaller cumulative effects of oil price shocks for these episodes of at most 1%.

Oil Prices and the Dynamics of Output and Real Exchange Rate

We examine the role of oil price shocks in effecting changes both at the aggregate and sectoral levels using an estimated dynamic stochastic equilibrium open economy model. Our main finding is that energy price shocks are not able directly to generate the magnitude of the economic downturn observed in the data. These shocks, however, do possess a strong indirect transmission link that endogenously spreads their effect through the system such that they account for a considerable portion of the U.S. business cycle movements. This leads us to conclude that previous results that attribute a minimal importance to oil price shocks must be focusing more on the energy cost share of gross domestic product and less on how they affect the intertemporal decisions of economic agents. We also find that external shocks have been responsible for explaining volatility in U.S. economic activities for a long time. This leads us to conclude that modelling the U.S. as a closed economy discounts a sizeable set of very relevant factors.

The Role of Oil Price Shocks in Causing U.S. Recessions

Although oil price shocks have long been viewed as one of the leading candidates for explaining U.S. recessions, surprisingly little is known about the extent to which oil price shocks explain recessions. We provide a formal analysis of this question with special attention to the possible role of net oil price increases in amplifying the transmission of oil price shocks. We quantify the conditional recessionary effect of oil price shocks in the net oil price increase model for all episodes of net oil price increases since the mid-1970s. Compared to the linear model, the cumulative effect of oil price shocks over the course of the next two years is much larger in the net oil price increase model. For example, oil price shocks explain a 3 percent cumulative reduction in U.S. real GDP in the late 1970s and early 1980s and a 5 percent cumulative reduction during the financial crisis. An obvious concern is that some of these estimates are an artifact of net oil price increases being correlated with other variables that explain recessions. We show that the explanatory power of oil price shocks largely persists even after augmenting the nonlinear model with a measure of credit supply conditions, of the monetary policy stance and of consumer confidence. There is evidence, however, that the conditional fit of the net oil price increase model is worse on average than the fit of the corresponding linear model, suggesting much smaller cumulative effects of oil price shocks for these episodes of at most 1 percent.

Markups and oil prices in Canada

The markup (the ratio of price to marginal cost) in Canada has risen steadily since the early 1990s suggesting a widening gap between the actual and the efficient level of output and a declining share of labor income in GDP. It exhibits non-stationary movements over the sample period 1982Q1 to 2009Q4, allowing us to identify a permanent markup shock. We provide evidence that oil price movements are important for understanding the behavior of the markup, and separately identify both oil price shocks and permanent non-oil markup shocks. Our key findings are: (1) oil price shocks and non-oil markup shocks account for 50 to 80percent of the variation in the markup, with the former dominating at shorter horizons; (2) the role of oil price shocks is prominent in accounting for the upward trend in the markup since the mid-1990s; (3) the direct effects of oil prices on the markup in the mining sector (which includes the oil-producing sector) have contributed the most to the upward trend in the aggregate markup; and (4) other explanations such as market structure shifts, trend inflation movements and the falling relative price of investment do not appear to account for the behavior of the markup.

Role of oil price shocks on macroeconomic activities: An SVAR approach to the Malaysian economy and monetary responses

This study examines the impact of oil price uncertainty on Malaysian macroeconomic activities and monetary responses. We use a structural VAR (SVAR) model based on monthly data over the period 1986−2009. The EGARCH model estimates show an important asymmetric effect of oil price shocks on the conditional oil price volatility. Dynamic impulse response functions obtained from the SVAR model show a prolonged dampening effect of oil price volatility shock on Malaysian industrial production. We also find that levels of Consumer Price Index (CPI) decline with a positive shock to oil price uncertainty. This is the result of negative demand shock due to the postponement of consumption of big ticket items by individuals, households and other sectors of the economy. We also found that the Malaysian central bank adopts an expansionary monetary policy in response to oil price uncertainty. Variance decomposition analysis reconfirms that volatility in the oil price is the second most important factor to explain the variance of industrial production after its own shocks. These results shed some light on how the central bank of Malaysia can use controlling mechanisms to stabilize aggregate output and price level.

The role of oil price shocks on China's real exchange rate

This paper investigates to what extent the oil price shock and three other types of underlying macroeconomic shocks impact the trend movements of China's real exchange rate. By constructing a four-dimensional structural VAR model, the results suggest that real oil price shocks would lead to a minor appreciation of the long-term real exchange rate due to China's lesser dependence on imported oil than its trading partners included in the RMB basket peg regime and rigorous government energy regulations. The real shocks, as opposed to nominal shocks, are found to be dominant in the variations of the real exchange rate.