Asymmetric Effect of Oil Prices on the Next 11 Equity Returns: Moderating Role of Economic Policy Uncertainty

This study aims to investigate the short-run and long-term impact of oil prices on the market returns of the Next Eleven (N11) economies in the presence of the moderating role of economic policy uncertainty on this relationship. This study uses monthly data on oil prices, economic policy uncertainty, and equity markets index from the period January 2005 to December 2022. Both ARDL and NARDL models are employed to examine the linear and asymmetric co-integration between oil prices and N11 market returns. The results of the ARDL model indicate that there is a statistically significant and positive correlation between oil prices and the equity market of Vietnam, but only in the long term. The selected countries demonstrate a more noticeable short-term connection as a result of the significant influence of oil prices on stock market returns. The NARDL technique reveals that oil prices have an asymmetric impact on the market returns of Pakistan, Bangladesh, Indonesia, Turkey, Vietnam, South Korea, and Mexico. In the short term, economic policy uncertainty has a moderating effect on the relationship between oil prices and the stock markets of Pakistan, South Korea, Mexico, Nigeria, and Egypt. This study is insightful for investors as by considering the uncertainty impact, they can restructure their portfolios and reallocate the risk accordingly. Investors should implement a flexible asset allocation strategy that adapts to fluctuations in the macroeconomic environment. Further, the practical implication of the research assists regulators in the fair price discovery through disclosure. Risk professionals should closely monitor the evolving global landscape since it will have an impact on the assets they manage.