The Relations of Oil Price Change with Fear Gauges in Global Political and Economic Environment

Abstract

The oil price time series data can be affected by major global political and economic events, which would result in structural changes that could lead to biased estimations. By adopting the Bai and Perron model this paper found that there were six structural breaks in the Brent oil price due to major global events and that ARDL-ECM cointegration exists only between oil price and stock market volatility index (VIX) throughout the sampling period. However, cointegration relations were found between oil price and Crude Oil Volatility Index (OVX) in the second and fourth sub-periods, and also between oil price and VIX in the second, third, fourth, sixth, and seventh sub-periods. Furthermore, the cointegration relation coupled with correlation analysis indicates a long-term equilibrium positive (negative) relation between the two variables. Such relations existed between the price and the two fear gauges, respectively, only for some specific sub-periods, implying that OVX seemed to be better than VIX in predicting oil price changes. We suggest that the investors in the global oil market must pay attention to not only the impacts of major global political and economic events on oil price, but also the positive or negative correlations between oil price and fear gauge.

Examining Network Structures and Dynamics of World Energy Companies in Stock Markets: A Complex Network Approach

“…Additionally, (Ahmadi et al, 2016) used structural vector autoregressive (SVAR) and found different responses to oil price shocks on the US stock market returns. Lin and Tsai (2019) found six structural breaks in the oil price due to major global events by applying structural change testing models and autoregressive distributed lag and error corrective model (ADRL-ECM). They directed investor attentions towards political and economic impacts on oil prices, combing with market fear gauge and the way it can affect oil prices.…”

What Drives Saudi Airstrikes in Yemen? An Empirical Analysis of the Dynamics of Coalition Airstrikes, Houthi Attacks, and the Oil Market

“…For our analysis, we compute weekly averages from the daily value. We select this volatility indicator because of its ample use in the literature (see Lin & Tsai, 2019). Still, to prove the robustness of our approach, we also provide our own volatility estimates from a GARCH model (Annex A1).…”

Oil Price and Stock Prices of EU Financial Companies: Evidence from Panel Data Modeling

“…At the same time, oil price fluctuation can be influenced by political and economic events that would lead to structural change, which on their side might generate biased estimations [13]. Thus, in a period of six months in 2017, several structural changes occurred in the Brent oil price.…”