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Time-varying and asymmetric effects of the oil-specific demand shock on investor sentiment

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  • Zhifang He
  • Fangzhao Zhou

Abstract

The relationship between oil price and investor sentiment is crucial to economic activity. Disentangling the shocks in crude oil price by structural VAR model, this paper analyzes the interaction between oil price shocks and investor sentiment by linear and nonlinear causality approach, TVP-VAR mode and NARDL model. The results reveal that changes of oil-specific demand shock not only linearly but also nonlinearly cause changes of investor sentiment while there is no significant link between other oil shocks (oil supply shock and aggregate demand shock) and investor sentiment. In addition, the study discovers that the oil-specific demand shock generally positively affects investor sentiment over time, and it has positive and asymmetric effects on investor sentiment in the short-run. In other words, it is the negative oil-specific demand shock rather than the positive component that has the significant impact on investor sentiment for short-run. This study could enrich current theories on the interaction between oil price and investor sentiment and serve as a supplement to current literature.

Suggested Citation

  • Zhifang He & Fangzhao Zhou, 2018. "Time-varying and asymmetric effects of the oil-specific demand shock on investor sentiment," PLOS ONE, Public Library of Science, vol. 13(8), pages 1-18, August.
    • Handle: RePEc:plo:pone00:0200734
    DOI: 10.1371/journal.pone.0200734
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