Oil Price Risk And Emerging Stock Markets Pdf

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The approach taken in this paper uses an international multi-factor model that allows for both unconditional and conditional risk factors to investigate the relationship between oil price risk and emerging stock market returns.

We provide some preliminary estimates about the behaviour of oil-stock nexus during COVID pandemic. Consequently, we conduct distinct analyses for periods before and after the announcement of the pandemic. A panel Vector Autoregressive pVAR model is constructed to analyse the response of oil and stocks to shocks. A panel Logit model is also formulated to evaluate the probability of having negative oil price and stock returns between the two data samples.

Dynamics of oil price shocks and emerging stock market volatility: a generalized VAR approach

We provide some preliminary estimates about the behaviour of oil-stock nexus during COVID pandemic. Consequently, we conduct distinct analyses for periods before and after the announcement of the pandemic. A panel Vector Autoregressive pVAR model is constructed to analyse the response of oil and stocks to shocks. A panel Logit model is also formulated to evaluate the probability of having negative oil price and stock returns between the two data samples.

The pVAR analyses suggest that both oil and stock markets may experience greater initial and prolonged impacts of own and cross shocks during the pandemic than the period before it.

This outcome is further corroborated by the panel Logit estimates suggesting that the probability of having negative oil and stock returns during the pandemic may be due uncertainty associated with the relevant markets. Although opinions for now are divided, some schools of thought are of the view that this could trigger another global financial crisis while others are of the view that the effect if not quickly halted could be worse than the SARS outbreak of in China, the global financial crisis and World War Two put together.

Isolating the analysis of oil-stock nexus from other variables during the pandemic is deliberate. This is apparent from the observed plummet in the stock prices of the major stock markets in the world as well as oil prices following the coronavirus outbreak. Emerging stock markets have also not been spared with the stock prices of Brazil declining by Globally, as shown in Fig.

Although COVID announcement and the pandemic may produce a short-term economic impact, however, this shock could adversely affect the oil price-stock nexus. This is the motivation for our study and the main objective is to examine the behaviour of oil-stock nexus during the pandemic relative to the evidence before it.

It is believed that our findings will offer areas for future research as events unfold during the pandemic. Information about the behaviour of the nexus in this difficult time is important for investment and policy decisions. For instance, policy makers are confronted with the choice between containing the virus and sustaining the economy.

Information about the extent of the behaviour of the two series during the pandemic will help determine how much sacrifice the relevant markets will have to endure to contain the virus. In other words, the analyses rendered in this study may help us determine how long it will take the impact of a shock due to either market will fizzle e out during the pandemic.

Also, investors seeking to minimize risks and by extension maximize returns will find this information useful particularly in terms of portfolio diversification and hedging strategy. We structure our study in such a way as to offer the following contributions to the literature on oil-stock nexus.

First, we partition our analyses into two periods for pre- and post-announcement of COVID pandemic and thereafter, we conduct distinct analyses for them. This becomes necessary given the trends in crude oil prices and some selected global stock indices see Fig. Lastly, this study may provide a lead for the monetary policy authority to evaluate the effectiveness of its policies in stabilizing the macro-economy after the COVID virus crisis subsides and the need for stress testing of the resilience of the oil price-stock nexus during a pandemic.

Note: All the variables are expressed in their returns form. DF denotes degrees of freedom and it equals the optimal lag length which is automatically determined using the Schwarz Information Criterion SIC. In addition, we construct a panel Vector Autoregressive pVAR model to analyse the response of both oil and stock prices to own and cross-shocks.

A major attraction to this model lies in its ability to accommodate short time dimension since the estimation follows the Generalized Method of Moments GMM procedure. Also, we formulate a panel Logit model to examine the probability of having negative stock returns in the presence of continuous decline in oil price and depreciation of exchange rate.

This is particularly predicated on the fact that, understanding the extent of negative returns during crisis is critical for investment decisions, particularly where the crisis is global in nature, thus, making it difficult for investors to diversify in the short term.

Following this introduction, the rest of the paper is structured as follows: Section 2 presents a brief review of the literature; Section 3 offers some stylized facts on the state of crude oil prices and global stock indices for both periods of pre- and post-COVID announcement; Section 4 presents the research methodology; Section 5 discusses the empirical results while Section 6 provides some policy implications of findings and concluding remarks.

The motivation for linking stock prices to oil price and vice versa is drawn from the work of Hamilton where the evidence suggests that movements in energy prices can be explained by macroeconomic performance of countries.

How macroeconomic variables react based on the oil—stock relationship aids policymaking, as it helps in understanding the resilience of an economy to both internal due to stock and external due oil shocks.

Hence, the behaviour of oil and stock markets particularly during the pandemic is key for policymaking and in attaining improved macroeconomic outcomes. The recent uncertainty in the global economy as a result of the COVID outbreak has garnered a great deal of curiosity including the relationship amongst oil prices movements, the economy and financial markets. In addition, Ashraf examines stock market response to the COVID pandemic in 64 countries and the study finds that stock market returns decline as the number of cases increases in a country.

With policy makers worried on how volatility in oil and stock markets is transmitted across the financial and real sectors of the economy, providing some preliminary estimates on the extent of behaviour between the financial and energy markets will present useful guide when making decisions. The global outbreak of the coronavirus has caused upheaval in stock markets and disrupted supply chains around the world.

With the exception of oil price, our analyses here cover fifteen countries that are worse hit by the COVID pandemic in terms of deaths as reported by the WHO. Oil prices as shown in Fig. This was the largest slump since in oil prices since the Gulf war as increased cases outside China spurred investor fears that the rapidly spreading outbreak could slow the global economy and a price war between Russia and Saudi Arabia led to the collapse of oil prices.

The downward trend continued amidst the World Health Organization WHO declaring a public outbreak, softening oil demand globally, particularly for transportation fuel as airlines cut flights and tourist cancel business trips and holidays. Unquestionably, information from movements in oil prices and the cases of the COVID outbreak are drivers in the movement of global stock markets.

As depicted in Fig. The start date for the former was informed by the available data for all the countries considered. Following the oil price and stock index descriptive statistics, is the exchange rate descriptive statistics for the various subsamples. These notable distinctions in the behaviour of crude oil, exchange rate and global stock prices over the two sub-samples constitute a major motivation for doing same in the empirical analyses.

The empirical model constructed here hinges on the possible interconnectedness across asset classes during crisis. This argument is well documented in Diebold and Yilmaz This information is particularly useful to investors who are more concerned about maximizing their returns even in the presence of risks.

If consistently updated, the analysis can also be used to track the progress made in curbing the widespread of the virus. It is hypothesized that the announcement of the COVID will have greater spill over effects on both commodity and financial markets and the response of the relevant agencies to the COVID epidemic determines the behaviour of these spillovers in the long run.

Defining the series this way helps to circumvent the problem of unit root. A typical pVAR model can be represented by the following system of linear equations 3.

We employ the GMM estimator and fit the model as a system of equations. Data was sourced from Bloomberg. We begin the analyses by examining the causality among the variables of interest — oil price, exchange rate and stock returns.

The results show a unidirectional causality from oil price returns to stock returns in the pre-announcement period while causality between crude oil price and stock returns is bi-directionally related post-announcement period. The continued slowdown in the level of economic activities after the pronouncement of COVID has affected both the demand for crude oil and increased uncertainties in financial markets including the stock markets.

Theoretically, the relationship between oil price returns and stock returns hinges on the cash flow hypothesis. From the foregoing, we construct a panel VAR model where oil price comes first, and stock returns comes last while exchange rate is an intervening variable that moderates the relationship between the two variables. This ordering is valid for both pre- and post-COVID announcement periods since oil price is dominant for the two periods. We are poised to provide some preliminary empirical results as regards the response of these variables to own and cross shocks before and after COVID announcement.

For a more realistic analysis for the post-COVID announcement, we limit the period to when it was pronounced to be pandemic by the World Health Organization where the panic among economic agents consumers, producers and governments had become evident across the globe. To further justify the partitioning into two sub-samples — pre- and post-pandemic announcement, we test for the significance of COVID pandemic announcement using a break point test to establish whether the sudden change in the oil and stock markets is statistically significant.

The statistical significance of the test indicates that the sudden change in the behaviour of the two markets due to COVID pandemic announcement is statistically significant and therefore the distinct analysis for the two periods is justified. The impulse response function is used to analyse both own shocks and cross shocks for oil price and stock returns.

The results of own shocks due to oil and stock returns are presented in Fig. As hypothesized, both Fig. A similar trend is observed for the cross-shocks see Fig. The implication of these findings is that investors in oil and stock markets during the COVID pandemic may witness greater initial impacts than normal before the pandemic.

The stability of the pVAR models is not in doubt as all the eigenvalues lie inside the unit circle see Fig. Thus, the PVAR satisfies the stability condition. We also provide additional results using the panel Logit regressions where both the stock and oil return series are dichotomized. In this case, we assign 1 to negative stock returns and zero otherwise, ditto for oil returns.

The Chi-square for the Hausman test is not statistically significant, hence, the choice of the Random effect estimator.

In the same vein, the results show that decline in stock returns increases the probability of having a negative oil price returns before the announcement of COVID as a global pandemic. The fact that the response of negative oil and stock returns is insignificant relative to the mentioned predictors during the pandemic suggests that these series are driven more by uncertainty shocks as observed from the impulse responses for the post-announcement period.

The additional results obtained using real exchange rate indicate contrasting evidence between the two periods. We find the relationship to be significant and positive for the pre-announcement period while it is negative and insignificant for the post-announcement period. This further validates the need to conduct distinct analyses for the two periods given their contrasting evidence.

Note : rexr and roil are return series for exchange rate and oil price respectively. This study provides some preliminary results on the behaviour of oil-stock nexus during the pandemic. Due to data limitation, we construct a panel VAR model that allows for short time series dimension while pooling stock price data from some of the countries cross-sections that seem to have been worse hit by COVID We model own shocks and cross shocks for oil price and stock prices and find the impact of shocks during the post-announcement of COVID to be more pronounced for oil and stocks albeit with a larger impact for the former.

In addition, a panel Logit model is employed where the probability of having negative oil and stock returns during the pandemic is evaluated. Thus, policy recommendation from the study revolves around the need for policymakers, globally to reduce uncertainties in financial markets.

This could be achieved by reducing policy inconsistencies and enhanced monetary and fiscal policy coordination that would guarantee effective implementation of policy decisions that would reduce the impact of the pandemic on the global economy.

Given the length of the COVID outbreak is unknown and the increasing spread to more countries around the world, there is need for future studies to update these preliminary estimates as events unfold. Afees A. Godday U. Ebuh: Conceptualization, Data curation, Validation. National Center for Biotechnology Information , U. Published online Jun Ebuh , b and Nuruddeen Usman b. Author information Article notes Copyright and License information Disclaimer.

All rights reserved. Elsevier hereby grants permission to make all its COVIDrelated research that is available on the COVID resource centre - including this research content - immediately available in PubMed Central and other publicly funded repositories, such as the WHO COVID database with rights for unrestricted research re-use and analyses in any form or by any means with acknowledgement of the original source. Open in a separate window. Global stocks daily Dec —May

Revisiting oil-stock nexus during COVID-19 pandemic: Some preliminary results

This paper assesses the impact of gold and oil price fluctuations on the volatility of the South African stock market and its component indices or sectors — namely, the financial, industrial and resource sectors — to infer the link between the commodity and stock markets in South Africa. Moreover, the paper assesses the magnitude of the optimal portfolio weight, hedge ratio and hedge effectiveness for portfolios constituted of a pair of assets, namely oil-stock and gold-stock pairs. The findings of the study show that there is significant volatility spillover between the gold and stock markets, and the oil and stock markets. This finding suggests the importance of the link between the commodity and stock markets, which is essential for portfolio management. With reference to portfolio optimization and the possibility of hedging when using the pairs of assets under study, the findings suggest the importance of combining gold and stocks as the best strategy to hedge against stocks risk, especially during financial crises.

Oil prices, exchange rates and emerging stock markets

Other versions of this item: Basher, Syed A. Ross, Stephen A. Stephen A.

Oil prices and stock returns: Evidence from emerging markets

This study aims to establish the dynamic relationship between international crude oil prices and Indian stock prices represented by the Bombay Stock Exchange BSE energy index. Considering vector autoregression estimation, the present study analyzes the relationship between the variables and tries to make a valid conclusion. The result of the co-integration test exhibits the presence of a long-term association between these two macro-economic variables during the period under study. Also, in the short-run VEC Granger causality result reveals that the movement of international crude oil price significantly influences the Indian stock price. To get a more robust result the study can be further extended by taking a longer time period with data of shorter time-frequency such as daily or weekly and further by using more sophisticated econometric and statistical tools.

While two different streams of literature exist investigating 1 the relationship between oil prices and emerging market stock prices and 2 the relationship between oil prices and exchange rates, relatively little is known about the dynamic relationship between oil prices, exchange rates and emerging market stock prices. This paper proposes and estimates a structural vector autoregression model to investigate the dynamic relationship between these variables. Impulse responses are calculated in two ways standard and projection based methods.

What was good for the global equity markets in the fourth quarter was even better for emerging markets. As of 31 December The performance quoted represents past performance. Past performance is not a reliable indicator of future results. This information is provided for illustrative purposes only and does not represent the performance of any product or strategy managed by Lazard. The indices are unmanaged and have no fees. The major events that propelled the strong fourth quarter may well continue to drive emerging markets in US elections also brought welcome news for the markets: Democrat and former Vice President Joseph Biden won the presidential election over Republican President Donald Trump, holding out the promise of more stability.

Revisiting oil-stock nexus during COVID-19 pandemic: Some preliminary results

Мозговой штурм был своего рода разведывательным экспериментом, который его создатели называли Симулятором причин и следствий. Сначала он предназначался для использования в ходе избирательных кампаний как способ создания в режиме реального времени моделей данной политической среды. Загруженная громадным количеством информации программа создавала паутину относительных величин - гипотетическую модель взаимодействия политических переменных, включая известных политиков, их штабы, личные взаимоотношения, острые проблемы, мотивации, отягощенные такими факторами, как секс, этническая принадлежность, деньги и власть. Пользователь имел возможность создать любую гипотетическую ситуацию, и Мозговой штурм предсказывал, как эта ситуация повлияет на среду.

 - Откроем пачку тофу. - Нет, спасибо.  - Сьюзан шумно выдохнула и повернулась к.  - Я думаю, - начала она, -что я только… -но слова застряли у нее в горле. Она побледнела.

Oil prices, exchange rates and emerging stock markets

 Чед? - В дверях его кабинета возникла Мидж Милкен, эксперт внутренней безопасности Фонтейна. В свои шестьдесят она была немного тяжеловатой, но все еще весьма привлекательной женщиной, чем не переставала изумлять Бринкерхоффа.

3 Response
  1. Claude C.

    This study investigates the transmission of volatility between OPEC-oil and sector stock returns in Pakistan.

  2. Oderico V.

    In general we find strong evidence that oil price risk impacts stock price returns in emerging markets. Results for other risk factors like market risk, total risk.

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