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Disentangling the role of the exchange rate in oil-related scenarios for the European stock market

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  • Ojea Ferreiro, Javier

Abstract

The literature has been analysing so far the response of the stock market to a distress scenario for oil prices considering prices in domestic currency. This assumption implies merging commodity risk and exchange rate risk. This article proposes to generate oil-related scenario depending on the source of risk. The same distress oil-related scenario in euros could generate an opposite impact on the European stock market depending on the source of risk. Results show higher losses for Eurostoxx when oil prices in euros experience a downward movement due to a decrease of oil price in US dollars and when oil prices in euros experience an upward movement due to a depreciation of the euro against the US dollar. This framework can improve our understanding of how the exchange rate interacts in global markets. Also, it contributes to the design of tailor-made international scenarios for stress testing.

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  • Ojea Ferreiro, Javier, 2020. "Disentangling the role of the exchange rate in oil-related scenarios for the European stock market," Energy Economics, Elsevier, vol. 89(C).
    • Handle: RePEc:eee:eneeco:v:89:y:2020:i:c:s014098832030116x
    DOI: 10.1016/j.eneco.2020.104776
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    More about this item

    Keywords

    Copula; Stress test scenario; Exchange rate; Spillover analysis; Oil shock;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources

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