Oil price shocks and financial stress: Who is the influencer?

Abstract

We contribute to the literature by being the first to examine the direction of causality between the different sources of oil price shocks and financial stress in the global financial markets (OFR), US, other advanced economies (OAE), and emerging markets (EM). Specifically, we aim to empirically answer a key question: Do global oil market shocks drive financial stress, or does financial stress spur oil market shocks? Using a two‐stage methodology based on the structural VAR (SVAR) and entropy‐based analysis over the period January 2000–October 2022, the results show that the links between financial stress and oil shocks are contingent on the type of shock. Within this, oil supply shock is mildly connected to financial stress; oil demand shock is vulnerable to innovation from financial stress; and oil‐specific demand shock has a noticeable time‐variable element wherein the shock prevails at the beginning of the sample and financial stress dominates the transmission at the end of the sample.