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

Abstract

This paper examines 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. The GVAR framework allows us to capture the transmission of local and global shocks, while simultaneously accounting for individual-country peculiarities. Utilising a recently developed model-free, robust estimate of oil price uncertainty, we document a statistically significant and negative effect of uncertainty shocks emanating from oil prices on the large majority of global stock markets, with the adverse effect of oil price uncertainty shocks found to be stronger for emerging economies as well as net oil-exporting nations. Interestingly, however, global stock markets exhibit a great deal of heterogeneity in their recovery following oil uncertainty shocks as some experience rapid corrections in stock valuations while others suffer from extended slumps. While the results are sensitive to the oil uncertainty measure utilised, they suggest that country diversification in the face of rising oil market uncertainty can still be beneficial for global investors as global stock markets exhibit a rather heterogeneous pattern in their recovery rates against oil market shocks.

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

“…Recent empirical studies related to the topic of oil price fluctuations are dominantly related to the issue of its uncertainty (Kocaaslan 2019;Cunado et al 2015;Jo 2014;Elder and Serletis 2010;Salisu et al 2022). This paper expands the existing literature by identifying the asymmetric effects of oil shocks on stock market indices of selected EU member states depending on the degree of import dependence on oil resources.…”

Oil-Price Uncertainty and International Stock Returns: Dissecting Quantile-Based Predictability and Spillover Effects Using More than a Century of Data

“…[15] employed a multi-factor model to show that oil-price risk tends to strongly affect a large set of emerging stock market returns. Moreover, the negative relationship between oil uncertainty and stock prices in a global vector-autoregressive model for a set of 26 advanced and developing countries considered together covering 90% of the world's Gross Domestic Product (GDP) has been validated [16].…”