Will Oil Price Volatility Cause Market Panic?

Abstract

It is generally known that violent oil price volatility will cause market panic; however, the extent to which is worthy of empirical test. Firstly, this paper employs the TVP-VAR model to analyze the time-varying impacts of oil price volatility on the panic index using monthly data from January 1990 to November 2021. Then, after using the SVAR model to decompose the oil price volatility, this paper uses the PDL model to analyze the heterogeneous impacts of oil price volatility from different sources. Finally, based on the results of oil decomposition, this paper uses the TARCH model to analyze the asymmetric impacts of oil price volatility in different directions. The results show that: (1) oil price volatility can indeed cause market panic, and these impacts exhibit time-varying characteristics; (2) oil price volatility from different sources has different impacts on the panic index, and the order from high to low is oil-specific demand shocks, supply shocks, and aggregate demand shocks; and (3) oil price volatility has asymmetric impacts on the panic index, and positive shocks have greater impacts than negative.

Times series analysis on crude oil price

“…VIX also shows a positive relationship with monthly crude oil prices. This is reasonable as crude oil price shock are often correlated with supply or demand shock, which usually brought by events that increase market volatility and cause panic (Hong et al, 2022). Generally speaking, our OLS model made a reasonable selection of variables.…”

Oil Price Spillover Effects to the Stock Market Sentiment: The Case of Higher vs. Lower Oil Import EU Countries

“…The strength of the impact itself depends on whether it is a systemic shock related to structural imbalances in the markets of all countries or is idiosyncratic in the context of the oil market itself (Sato et al 2013). Regardless of the origin of the shock on the oil market, through different channels, it will have a direct transmission to the real economy (Hong et al 2022). Depending on whether it is a positive or negative shock, or whether the country is an oil importer or oil exporter, there is an increase or decrease in economic activity in the country.…”