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Time-varying effects of oil price shocks on financial stress: Evidence from India

Author

Listed:
  • Anand, B.
  • Paul, Sunil
  • Nair, Aswathi R.

Abstract

The emergence of crude oil as an essential portfolio asset warrants an in-depth examination of the nexus between oil shocks and financial stress. This paper identifies and analyses the impact of oil supply shocks, demand-specific oil shocks and risk-related shocks on financial stress in a multivariate time series model with time-varying coefficients and a variance-covariance matrix. The empirical results show that the underlying shocks affect the financial sector differently. The oil supply shocks, in general, do not impact financial stress significantly. However, the results of expected demand shocks exhibit interesting patterns. The shocks emanating from expected demand minimise financial stress in both short and long time horizons. The risk-related shocks captured by the CBOE volatility index indicate the worsening of financial stress when market risk rises, and investors' sentiments deteriorate. The empirical results in this study validate the financialisation of crude oil.

Suggested Citation

  • Anand, B. & Paul, Sunil & Nair, Aswathi R., 2023. "Time-varying effects of oil price shocks on financial stress: Evidence from India," Energy Economics, Elsevier, vol. 122(C).
    • Handle: RePEc:eee:eneeco:v:122:y:2023:i:c:s0140988323002013
    DOI: 10.1016/j.eneco.2023.106703
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    Cited by:

    1. Yicong Lin & Mingxuan Song, 2023. "Robust bootstrap inference for linear time-varying coefficient models: Some Monte Carlo evidence," Tinbergen Institute Discussion Papers 23-049/III, Tinbergen Institute.

    More about this item

    Keywords

    Crude oil; Financial stress index; Time-varying VAR;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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