Oil beta uncertainty and global stock returns

Oil Price Uncertainty Shocks and Global Equity Markets: Evidence from a GVAR Model

“…We observe in Figure 1 that a one-standard-deviation shock prompted by oil uncertainty causes a statistically significant initial decline in real stock prices in the large majority of the countries in the sample (23 out of the 26). In terms of the magnitude of the impact, consistent with the recent evidence by Chen and Demirer (2022) on global oil exposures, we observe rather heterogenous effects in the magnitude of the responses, ranging from 1% to 10% with generally larger effects observed for net oil-exporting countries as well as those with high economic complexity as will be discussed in our subsequent analysis. The largest negative impact is observed in the case of S. Korea and Malaysia whereas the effect is found to be insignificantly negative for several countries including Italy, the Philippines, and Spain.…”

“…Building on the pioneering works by Bernanke (1983) and Pindyck (1991), the oilstock market literature argues that uncertainty and the real options effect associated with investment decisions driven by high oil price uncertainty create cyclical fluctuations in investments by lowering firms' incentives for immediate investment activities. This, in turn, affects the cash flows generated by firms as well as the discount rates used in firm valuations, thus, opening a channel in which oil market uncertainty impacts stock prices and/or returns (Swaray and Salisu 2018;Chen and Demirer 2022). Given the importance of oil as a major input factor for business operations that drive the real economy, its volatility may influence both investment and policy decisions.…”

“…Accordingly, the literature offers various studies that examine the validity of theoretical arguments that associate oil price uncertainty with stock prices and or/returns via the investment and dividend channels for both the developed (see, Sadorsky (1999); Masih et al (2011); Alsalman (2016); Diaz et al (2016); Rahman (2021)) and emerging economies (see, Jiranyakul (2014); Aye (2015); Bass (2017); Benavides et al (2019)). 1 However, as Chen and Demirer (2022) note, the literature offers mixed evidence at best regarding the effect of oil price fluctuations on stock market dynamics with the majority of the studies documenting a negative oil price effect on stock market returns (e.g., Chen 2009;Basher et al 2012), while others find insignificant (Demirer et al 2015;Hatemi et al 2017) and, in some cases, positive (e.g., Zhu et al 2011;Silvapulle et al 2017) oil price effects. Against this background, in contrast with the country-specific/firm-level analyses that are popular in the literature, we contribute to the extant literature by examining the propagation of oil price uncertainty shocks to real equity prices using a large-scale Global Vector Autoregressive (GVAR) model of 26 advanced and emerging stock markets.…”

Spillover Connectedness among Global Uncertainties and Sectorial Indices of Pakistan: Evidence from Quantile Connectedness Approach

“…Such transaction shows an incredible volume of potential volatility in financial markets. In line with this, the financial markets of developing countries are found to be rapidly responsive to global uncertainty [6]. Similarly, global uncertainty affect domestic financial market in developing countries, particularly small open economies such as Pakistan [7].…”