The Dynamics of Oil Prices, Exchange Rates, and the Stock Market Under COVID-19 Uncertainty: Evidence From India

Abstract

This study empirically analyzes the dynamic relation between oil price returns, exchange rates, stock returns, and uncertainty shocks. Utilizing daily data, we employ a structural vector autoregression econometric technique to explore the impact of uncertainty in the Indian context. The study finds that COVID-19-induced uncertainty dampened the oil and stock markets. Further, findings suggest that COVID-19-induced uncertainty distorted the dynamics between oil and stock prices in the initial periods, due to the cautionary approach followed by investors.

The effects of COVID-19 on the interrelationship among oil prices, stock prices and exchange rates in selected oil exporting economies

“…Our results are consistent with the findings documented in Thorbecke (2021) , Narayan et al (2020) , Camba and Camba (2020) , Aslam et al (2020) , Syahri and Robiyanto (2020) , Hoshikawa and Yoshimi (2021) , Prabheesh and Kumar (2021) , Amewu et al (2022) , Narayan (2022) . For example, Syahri and Robiyanto (2020) found significant relationship between exchange rate and composite stock price index during the coronavirus era; Aslam et al (2020) confirmed that the efficiency of the foreign exchange market for six major global currencies declined during the earlier part of the COVID-19 pandemic; Narayan et al (2020) recorded significant dynamic correlation between the Japanese Yen and the stock market returns, as the Yen depreciated against the US dollar, the returns on stock market improved in Japan.…”

“…This shows that changes in exchange rates in these net-oil producing economies appear to negatively affect their stock markets, i.e., exchange rates appear to deteriorate stock markets performances in this economies. The result is consistent with the findings of Basher et al (2012) , Kumar (2019) , Narayan (2020) , Syahri and Robiyanto (2020) , Aslam et al (2020) , Prabheesh and Kumar (2021) . For example, Narayan (2020) found a significant effect of the uncertainty caused by COVID-19 on the Japanese Yen and argued that the currency market was non-stationary in the pre-COVID-19, but become stationary during the COVID-19 period.…”

“…This indicates that before COVID-19, exchanges rates improve oil price returns. This finding supports studies such as Hiemstra and Jones (1994) ; Kumar (2019) ; Sadorsky (2000) ; Zhang and Wei (2010) ; Reboredo (2012) ; Salisu et al (2020) ; Devpura (2021) ; Prabheesh and Kumar (2021) ; Candila et al (2021) . For example, Salisu et al (2020) claimed that oil price is a good predictor of exchange rate returns in BRICS (Brazil, Russia, India, China and South Africa) economies.…”

“… Camba and Camba (2020) also find a negative effect of COVID-19 on exchange rate and stock exchange market in the Philippines. Prabheesh and Kumar (2021) analysed the dynamics in the foreign exchange rate and stock markets during the COVID-19 period in India and documented that the stock market was negatively impacted.…”

“…Contrariwise, Zhang, Fan, Tsai, and Wei (2008) found that global crude oil prices are strongly affected by the US dollar exchange rate in the long run, however, with restricted impact in the short term. Following the outbreak of COVID-19 pandemic, some researches have been conducted on the correlation between crude oil and foreign exchange rate markets (see for example, Devpura, 2020 ; Salisu et al, 2020 ; Devpura, 2021 ; Villarreal-Samaniego, 2021 ; Prabheesh and Kumar, 2021 ; Asaad, 2021 ; Candila et al, 2021 ; Rai and Garg, 2021 ; Villarreal-Samaniego, 2021 ; Ozturk and CAVDAR, 2021 ; Baek, 2022 ).…”