Oil price shocks and emerging stock markets revisited

Abstract

PurposeThe study aims to understand the role of different streams of oil shocks (demand, supply and risk shocks) on the oil-importing and exporting countries' stock returns. The study also examines the impact of crude oil shocks across the economic regimes and market states. Besides, the role of the Global Financial Crisis (GFC) of 2008 in shaping the oil–stock relationship is also investigated.Design/methodology/approachThe authors revisit the impact of oil shocks on emerging equity markets by using the novel shock decomposition algorithm proposed by Ready (2018). The authors consider 24 emerging equity markets for the period spanning over July 15, 2002, to June 18, 2018, and bifurcate them based on oil dependence. The authors use rolling and dynamic conditional correlation analysis to understand the time-varying co-movements between oil prices and stock returns. The regime and state-specific dependence of stock returns on the structural oil shocks are captured by the Markov regime switching and quantile regression models.FindingsThe authors find that the demand shocks are positively associated with stock markets, whereas the supply shocks are negatively related, except in some of the oil-exporting countries. The risk-based shocks also appear to have a negative association with stocks. The authors do not find evidence of strong regime dependence and the direction of relationship across the high and low regimes is somewhat stable. Further, the authors observe an intense oil–stock relationship in the bearish market conditions. Besides, the authors also report evidences of changes in oil–stock relationship onset the GFC.Originality/valueThis is among the first studies to use the oil shock decomposition algorithm of Ready (2018) in the context of emerging equity markets. Additionally, oil shocks' role on the stock market movements across the regimes and market states is studied comprehensively. Thus, the nature of oil shock and the extent to which the emerging markets are exposed is observed in this study.

Oil price volatility and firm profitability: an empirical analysis of Shariah-compliant and non-Shariah-compliant firms

“…An increase in oil prices moves wealth from oil-importing countries to oil-exporting countries. Earlier studies show that oil price volatility as a source of uncertainty has a significant impact on the aggregate output of the country (Ferderer, 1996), corporate investment decisions (Alhassan, 2019; Henriques and Sadorsky, 2011; Maghyereh and Abdoh, 2020; Phan et al , 2019) and stock market returns (Das et al , 2020; Bahloul and Amor, 2021; Alqahtani et al , 2019). While many existing studies have explored the financial and economic effects of oil price volatility, little empirical analysis exists on the impact of oil price volatility on firms' profitability, and it is limited to the banking industry.…”

Time varying intra/inter quantile developing relationship of Islamic stock returns: empirical evidence from Indonesia using QBARDL

“…Their study uses structural vector auto-regression and impulse responses to examine the dynamic (2019) observe high volatility in the stock markets due to movement in the oil prices. Das et al (2020) conclude that the oil and stock markets exhibit stronger relationship in the bearish markets. Demand shocks are positively related to the stock markets and supply shocks are negatively (Das et al, 2020).…”

Co‐movement among oil, stock, bond, and housing markets: An analysis of U.S., Asian, and European economies

“…As mentioned by Herrera et al (2019), among others, Ready's (2018) technique addresses several problems that researchers encountered in earlier models. Due to its appeal, Ready's (2018) methodology has gained popularity, and a line of work that evaluates the effects of disentangled oil shocks using this novel decomposition technique has emerged (see for instance Das et al, 2022, Anand & Paul, 2021, and Umar et al, 2021, among others. )…”

“…In a fairly recent study, Ready (2018) developed a novel decomposition technique to disentangle oil shocks and found that demand shocks are strongly positively related with market returns and economic output, whereas supply shocks have a strong negative relationship. Extending Ready's (2018) work, Das et al (2022) evaluated the stock markets of several emerging countries and showed that demand shocks are positively associated with the stock markets of several emerging countries, whereas supply shocks are negatively related, except in some oil-exporting countries. Anand and Paul (2021) reported similar findings, focusing only on the Indian stock market.…”

“…3 3 See, for instance, Das et al (2022), Anand and Paul (2021), and Umar et al (2021), among others. …”