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A Treatise on Oil Price Shocks and their Implications for the UK Financial Sector: Analysis Based on Time‐Varying Structural VAR Model

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  • Muhammad Ali Nasir
  • Sabih Abass Rizvi
  • Matteo Rossi

Abstract

In this paper, we examined the association among the energy sector stock, oil prices and stock market on the whole. We also considered the UK position from the net oil exporter to net oil importer and implications of the Global Financial Crises. Employing a Time‐Varying Vector Auto‐regressive framework on monthly data from January 1990 to June 2015 in which the sources of time variation were both the coefficients and variance‐covariance matrix of the innovations, this study found that historically oil price shocks have negatively affected the stock market, however the energy sector stock has always responded positively holding their title as hedge against oil shocks. It was also found that the shift from net oil exporter to net oil importer did not influence the association between the UK stock market and oil shocks much. Including the discrete break and subsampling of series led to controlling for the prior beliefs and agent's behaviour in the Pre‐GFC period. It turned out that the GFC had been a game changer and the stock market as well as the energy sector showed a positive and symmetric response to oil shocks. These findings have profound implications in terms of depressed global aggregate demand and oil shocks dynamics in the Post‐GFC world.

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  • Muhammad Ali Nasir & Sabih Abass Rizvi & Matteo Rossi, 2018. "A Treatise on Oil Price Shocks and their Implications for the UK Financial Sector: Analysis Based on Time‐Varying Structural VAR Model," Manchester School, University of Manchester, vol. 86(5), pages 586-621, September.
    • Handle: RePEc:bla:manchs:v:86:y:2018:i:5:p:586-621
    DOI: 10.1111/manc.12206
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    10. Sharneet Singh Jagirdar & Pradeep Kumar Gupta, 2023. "Value and Contrarian Investment Strategies: Evidence from Indian Stock Market," JRFM, MDPI, vol. 16(2), pages 1-19, February.
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    14. Ding, Qian & Huang, Jianbai & Zhang, Hongwei, 2021. "The time-varying effects of financial and geopolitical uncertainties on commodity market dynamics: A TVP-SVAR-SV analysis," Resources Policy, Elsevier, vol. 72(C).
    15. Balcilar, Mehmet & Demirer, Rıza & Hammoudeh, Shawkat, 2019. "Quantile relationship between oil and stock returns: Evidence from emerging and frontier stock markets," Energy Policy, Elsevier, vol. 134(C).
    16. Sadeghi, Abdorasoul & Roudari, Soheil, 2022. "Heterogeneous effects of oil structure and oil shocks on stock prices in different regimes: Evidence from oil-exporting and oil-importing countries," Resources Policy, Elsevier, vol. 76(C).
    17. Muhammad Ali Nasir & Muhammad Shahbaz & Trinh Thi Mai & Moade Shubita, 2021. "Development of Vietnamese stock market: Influence of domestic macroeconomic environment and regional markets," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 1435-1458, January.
    18. Mishra, Bibhuti Ranjan & Pradhan, Ashis Kumar & Tiwari, Aviral Kumar & Shahbaz, Muhammad, 2019. "The dynamic causality between gold and silver prices in India: Evidence using time-varying and non-linear approaches," Resources Policy, Elsevier, vol. 62(C), pages 66-76.
    19. Alkathery, Mohammed A. & Chaudhuri, Kausik & Nasir, Muhammad Ali, 2023. "Dependence between the GCC energy equities, global clean energy and emission markets: Evidence from wavelet analysis," Energy Economics, Elsevier, vol. 121(C).
    20. Zhang, Wen, 2022. "China’s government spending and global inflation dynamics: The role of the oil price channel," Energy Economics, Elsevier, vol. 110(C).
    21. Alkathery, Mohammed A. & Chaudhuri, Kausik & Nasir, Muhammad Ali, 2022. "Implications of clean energy, oil and emissions pricing for the GCC energy sector stock," Energy Economics, Elsevier, vol. 112(C).

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