Electricity market integration,decarbonisation and security of supply: Dynamic volatility connectedness in the Irish and Great Britain markets

This study investigates the volatility connectedness between the Irish and Great Britain electricity markets and how it is driven by changes in energy policy, institutional structures and political ideologies. We assess various aspects of this volatility connectedness including static (unconditional) vs dynamic (conditional), symmetric vs asymmetric characteristics between 2009 and 2018. We find that the volatility connectedness is time-varying and it is significantly affected by important events, policy reforms or market re-designs such as Brexit, oil price slump, an increasing share of renewables, and fluctuations in the exchange rates. Our asymmetric analysis shows that magnitude of the good volatility connectedness is marginally larger than that of the bad volatility connectedness. Our result suggests that good volatility levels would be even higher once the Irish market adopts the carbon price floor. Therefore, supporting renewable generation by setting an appropriate price of carbon in interconnected wholesale electricity markets will improve market integration.     

Time and frequency connectedness among oil shocks,electricity and clean energy markets

This paper examines the time and frequency connectedness among electricity, carbon and clean energy markets, and oil price demand and supply shocks. In doing so, we use the spillover method proposed by Diebold and Yilmaz (2012) and its extension in the frequency domain by Baruník and Křehlík (2018). We find increased connectedness during the global financial crisis as well as in the shale oil revolution period. The total connectedness is also higher in the short-run compared to the long-run. Due to their low connectedness, electricity futures can act as a risk diversifier and safe-haven asset against oil shocks. Net pairwise directional connectedness among oil shocks and the clean energy index is higher during the shale oil revolution. These results have important implications for investors with different investment time horizons.     

Oil price shocks,global financial markets and their connectedness

This paper extends the literature on the relationship between oil price shocks and financial markets by examining the effect of oil shocks on the sovereign bond markets of a large number of advanced and emerging economies and exploring the impact of oil shocks on the degree of connectedness among international financial markets. We show that the effect of oil price shocks is not only limited to stock market returns, but also extends to bond markets, even after controlling for discount rate shocks as well as aggregate capital market effects. Unlike the case for stock markets, the effect on sovereign bonds is found to be rather heterogeneous (in terms of size and sign) and primarily driven by demand related shocks. We also show that oil price shocks serve as a driver of connectedness patterns across global financial markets, although the effect on connectedness depends on the nature of the oil market shock and the economic characteristics of the countries. Overall, the findings highlight the role of crude oil as a driver of not only of return dynamics in global stock and bond markets, but also of global financial connectedness patterns.     

Oil shocks and financial systemic stress: International evidence

By conducting a structural VAR analysis on the financial systemic stress in 20 countries, this paper provides international evidence that oil structural shocks impact not only stress in individual financial markets but also their connectedness. The oil structural shocks explain a large fraction of the variation in the connectedness among various financial markets. The effect of oil structural shocks on financial systemic stress is largely dependent on the origins of oil price changes and a country's net oil export position. In most oil importing economies, financial systemic stress is negatively impacted by supply and aggregate demand shocks and positively impacted by oil-market specific demand shocks. Opposite patterns are detected in oil exporting economies. The effects of the spillovers are asymmetrically related with market conditions: During normal periods, more risks are spilled over from the oil market to financial systems, but during financial crises, the opposite occurs. In periods of financial crises and oil price collapses, there is noticeable contagion between the oil market and financial systems.     

The macroeconomic effects of oil price fluctuations on a small open oil-producing country: The case of Trinidad and Tobago

Using vector autoregressive (VAR) methodology, this paper empirically investigates the macroeconomic effects of oil price fluctuations on Trinidad and Tobago. Overall, we find that the price of oil is a major determinant of economic activity of the country. Our impulse response functions suggest that following a positive oil price shock, output falls within the first two years followed by positive and growing response. We also investigate the macroeconomic impact of oil price volatility. Results suggest that an unanticipated shock to oil price volatility brings about random swings in the macroeconomy; however, only government revenue and the price level exhibit significant responses. With regard to the magnitude of the responses, shocks to oil price volatility tend to yield smaller macroeconomic impacts in comparison to shocks to oil prices. Variance decompositions suggest that the price of oil is a major component of forecast variation for most macroeconomic variables. Finally, Granger-causality tests indicate causality from oil prices to output and oil prices to government revenue.     

Another perspective on gasoline price responses to crude oil price changes

The effects of oil price volatility on the responses of gasoline prices to oil price shocks have received little attention in discussions on the relationship between the prices of crude oil and gasoline. In this paper we consider such effects by using a bivariate structural vector autoregression which is modified to accommodate GARCH-in-mean errors. Our measure of oil price volatility is the conditional variance of the oil price–change forecast error. We isolate the effects of volatility in the price of oil on the price of gasoline and employ simulation methods to calculate nonlinear impulse response functions (NIRFs) to trace any asymmetric effects of independent oil price shocks on the conditional means of gasoline prices. We test whether the relationship between the prices of crude oil and gasoline is symmetric using tests of the null hypothesis of symmetric impulse responses. Based on monthly U.S. data over the period from 1978:1 to 2014:11, our empirical results show that gasoline prices respond asymmetrically to positive and negative oil price shocks. We also find that oil price volatility has a positive effect on the price of gasoline and it contributes to the asymmetries in the transmission of oil price shocks.     

Examining crude oil price – Exchange rate nexus for India during the period of extreme oil price volatility

This study probes crude oil price – exchange rate nexus for India using daily data for the time span July 2, 2007–November 28, 2008. Generalized autoregressive conditional heteroskedasticity (GARCH) and exponential GARCH (EGARCH) models have been employed to examine the impact of oil price shocks on nominal exchange rate. The study reveals that an increase in the oil price return leads to the depreciation of Indian currency vis-à-vis US dollar. The study also establishes that positive and negative oil price shocks have similar effects, in terms of magnitude, on exchange rate volatility and oil price shocks have permanent effect on exchange rate volatility.     

How is volatility in commodity markets linked to oil price shocks?

This study investigates the effects of oil price shocks on volatility of agricultural and metal commodities. We decompose an oil price shock to its underlying components, including macroeconomics and oil specific shocks. The applied method is the structural vector autoregressive (SVAR) model and the time span is from April 1983 to May 2014. The investigation is divided into two subsamples, before and after May 2006 for agriculture taking into account the 2006–2008 food crisis and change in U.S. ethanol production policy, and before and after January 2008 for metals considering the recent global financial crisis. We find that, based on impulse response functions, the response of volatility of each commodity to an oil price shock differs significantly depending on the underlying cause of the shock for the both periods. Moreover, according to variance decomposition the explanatory power of oil shocks becomes stronger after the crisis. The different responses of commodities are described in detail by investigating market characteristics in each period.     

Which oil shocks really matter in equity markets?

This paper examines the relationship between structural oil shocks and US equity markets. The recent oil shock decomposition of Ready (2018) is reconsidered and refined, providing a clearer delineation between shocks to equity market discount rates and aggregate demand, leading to an oil shock specification which attributes substantially more explanatory power to the latter in explaining equity market variation. Providing links with the literature dating back to Kilian and Park (2009), an explicit role is given to precautionary demand shocks using an independent measure constructed from oil futures data, reducing the role of the supply shocks obtained as the final residual in the recursive identification scheme. In an extended sample that allows an analysis of the oil/equity market relationship since the global financial crisis, the modified aggregate demand shocks have approximately twice as much explanatory power for stock return variation than the demand shocks of Ready (2018). The importance of these shocks in driving oil price changes and equity market volatility has only increased since the financial crisis, with the role of supply shocks diminishing. Once these demand effects are accounted for, there is little relationship between precautionary demand shocks and equity returns, in contrast to the existing literature.     

The impacts of structural oil shocks on macroeconomic uncertainty: Evidence from a large panel of 45 countries

Using local projection methods, this paper employs monthly panel data from 1989 to 2017 to examine both linear and nonlinear impulse responses of macroeconomic uncertainty to structural shocks to global oil production, aggregate demand, oil-market-specific demand and speculative demand in a large group of 45 economies. We find that both oil supply and demand shocks are important drivers of uncertainty. There is strong evidence that the impacts of oil price shocks on macroeconomic uncertainty are regime-dependent and contingent on the states of investor sentiments and perceived volatility in financial markets. The responses of economic uncertainty to oil shocks, especially demand-side shocks, appear to experience a dramatic change in the post-Global Financial Crisis period.     

On the intraday dynamics of oil price and exchange rate: What can we learn from China and India?

The main aim of this paper is to investigate the volatility determinants of crude oil and foreign exchange markets and jump spillover between them. We consider currencies of two major oil-importing countries (India and China) over the sample period of January 1, 2013 to October 31, 2019. We find evidence of positive return spillover from the oil to the foreign exchange market; however, there is a lack of return spillover in the other direction. Oil jumps appear to have a negative impact on exchange rate conditional volatility, and the latter responds asymmetrically to disentangled (positive and negative) oil price jumps. We also report disentangled exchange rate jumps' significant impact on conditional oil price volatility. These results, however, are asymmetric based on the nature of jumps and alternative oil price series. Finally, we do not find evidence of co-jump between the oil and foreign exchange markets. These results have important implications for investors and policymakers.     

Oil shocks and stock markets revisited: Measuring connectedness from a global perspective

This paper contributes to the large volume of empirical studies on the relationship between oil shocks and stock markets from a new systemic perspective. The method of measuring connectedness proposed by Diebold and Yilmaz (2009, 2012, 2014) is adopted to study the relationship between oil shocks and returns at six major stock markets around the world. It is shown that the contribution of oil shocks to the world financial system is limited. Oil price changes, however, can be explained by information on the financial system. Furthermore, a rolling windows analysis finds that oil shocks can occasionally contribute significantly to stock markets, and it is also proved that only large shocks matter.     

Dynamic link between oil prices and exchange rates: A non-linear approach

We explore the non-linear relationship between crude oil prices and exchange rates of major currencies from quantitative and structural perspectives, by utilizing bivariate normal mixture model. The correlation coefficients between oil prices and exchange rates demonstrate that their dependences typically start from 2004 then dynamically change over time. Then we investigate whether business cycle and oil price shocks as two possible exogenous factors affect the dependence structure of oil-FX linkage. We find significant structural heterogeneity during economic expansion while little evidence of heterogeneity in recession. This finding provides alternative interpretations for the enhanced dependence between oil prices and exchange rates and generates implications of financialization in commodity market. In terms of oil price shocks (Kilian, 2009), the normal mixture model captures significant heterogeneity, implying that unstable oil-FX dependence structure is frequently associated with oil aggregate demand shocks and oil-specific demand shocks. With an emphasis on the dynamic weights of two underlying states, we interestingly find that structural heterogeneities coincide with a variety of geopolitical and economic events. The application of normal mixture not only provide us knowledge of non-linear relationship between oil prices and exchange rates but also guidance for investors in risk management and portfolio diversification complementary to the traditional portfolio theory based on normal distribution.     

Time-varying co-movements between energy market and global financial markets: Implication for portfolio diversification and hedging strategies

This study explores the time patterns of volatility spillovers between energy market and stock prices of seven major global financial markets including clean energy, energy, information technology corporations, equity markets and United States economic policy index over the period vary from December 28, 2000 to December 31, 2018. We employ a time domain connectedness measures of Diebold and Yilmaz (DY, 2009, 2012 and 2014) to examine spillover mechanism of volatility shocks across future markets. Optimal weights and hedge ratios are calculated for portfolio diversification and risk management. The main findings of the study conclude that oil shocks are exogenous and contribution of oil market volatility to global financial markets is insignificant. The returns of World Stock Index and World Energy Index are major transmitters of volatility to clean energy market. Moreover, the impact of energy market become strong in global financial market when data is divided into pre, during and post financial crisis periods. Finally, the hedge ratios are volatile over time and their maximum value is observed during the financial crisis period of 2008–09. The optimal portfolio between energy and stock prices are heavily weighted to the stock markets.     

Causal flows between oil and forex markets using high-frequency data: Asymmetries from good and bad volatility

This paper investigates the causal linkages in volatility between crude oil prices and six major bilateral exchange rates against the U.S. dollar in the time-frequency space using high-frequency intraday data. Special attention is paid to the potential asymmetries in the causal effects between oil and forex markets. The wavelet-based Granger causality method proposed by Olayeni (2016) is applied to quantify the causal relations in the time and frequency domains simultaneously. Moreover, the realized semivariance approach of Barndoff-Nielsen et al. (2010) is used to account for possible asymmetries in the transmission of volatility shocks. The empirical results show that the significant causal links between oil prices and exchange rates are mainly concentrated in the long-run and during periods of increased economic and financial uncertainty such as the global financial crisis and the subsequent European sovereign debt crisis. Further, the causal effects from currency markets to the crude oil market are stronger than in the opposite direction, consistent with the forward-looking nature of exchange rates, the role of the U.S. dollar as the key invoicing currency for global oil trading and the expanding financialization of the oil market since the mid-2000s. In addition, significant asymmetries coming from good and bad volatility are found at longer horizons. Specifically, bad volatility seems to dominate good volatility in terms of the importance of transmission of volatility shocks.     

The effects of oil price shocks on the Iranian economy

The Iranian economy is highly vulnerable to oil price fluctuations. This paper analyzes the dynamic relationship between oil price shocks and major macroeconomic variables in Iran by applying a VAR approach. The study points out the asymmetric effects of oil price shocks; for instance, positive as well as negative oil price shocks significantly increase inflation. We find a strong positive relationship between positive oil price changes and industrial output growth. Unexpectedly, we can only identify a marginal impact of oil price fluctuations on real government expenditures. Furthermore, we observe the ”Dutch Disease” syndrome through significant real effective exchange rate appreciation.     

Connectedness of economic policy uncertainty and oil price shocks in a time domain perspective

In this paper, we investigate causality and connectedness between economic policy uncertainty and oil price shocks across time scales. By incorporating the wavelet approach into the structural vector autoregression (VAR) framework proposed by Diebold and Yilmaz (2009, 2012, 2014), we find that crude oil prices behave like receivers of information from economic policy uncertainty, regardless of time scale. However, the causality relationship between economic policy uncertainty and oil price shocks intensifies as time scales increase. In addition, the connectedness relationship is robust to time scale changes, whereas the causal relationship intensifies as time scales increase. Notably, the weight of US economic policy uncertainty increases in the VAR system as time scales increase. In particular, we employ the West Texas Intermediate (WTI) crude oil price as an alternative measure to increase the robustness of our results and identify differences in the VAR system. Overall, the total connectedness of the WTI crude oil price is lower than that of the Brent crude oil price, regardless of time scale. Our results provide meaningful information for both investors and policymakers.     

Oil price volatility and stock price fluctuations in an emerging market: Evidence from South Korea

How important are oil price fluctuations and oil price volatility on equity market performance? What are the policy implications if volatility turns out to be significant? We assess this issue in an economics/finance nexus for Korea using a VEC model including interest rates, economic activity, real stock returns, real oil prices and oil price volatility. Our main aim is to capture the effects of crude oil prices on the Korean economy thoroughly covering the period of the Asian Financial Crisis of 1997, which heavily affected the country, and the oil price hikes in the early 1990s after the Gulf War. South Korea was the country most hit by the financial crisis together with Indonesia and Thailand. Results indicate the dominance of oil price volatility on real stock returns and emphasize how this has increased over time. Oil price volatility can have profound effect on the time horizon of investment and firms need adjust their risk management procedures accordingly. This increase in dependency has been found in other net oil importing emerging equity markets. We test the relationship between oil price movements and economic activity by using modern time series techniques in a cointegrating framework. We expand the standard error correction model by examining the dynamics of out of sample causality through the generalized variance decomposition and impulse response function techniques. The evidence from persistence profiles also gives important guidelines based on how fast the entire system adjusts back to equilibrium. In addition, we find the cointegrating relationship to be stable and find that the linear error correction model to be more favorable than an asymmetric 2 period Markov switching model.     

Cyclical properties of supply-side and demand-side shocks in oil-based commodity markets

Oil markets profoundly influence world economies through determination of prices of energy and transports. Using novel methodology devised in frequency domain, we study the information transmission mechanisms in oil-based commodity markets. Taking crude oil as a supply-side benchmark and heating oil and gasoline as demand-side benchmarks, we document new stylized facts about cyclical properties of the transmission mechanism generated by volatility shocks with heterogeneous frequency responses. Our first key finding is that shocks to volatility with response shorter than one week are increasingly important to the transmission mechanism over the studied period. Second, demand-side shocks to volatility are becoming increasingly important in creating short-run connectedness. Third, the supply-side shocks to volatility resonating in both the long run and short run are important sources of connectedness.     

Exogenous shocks and the spillover effects between uncertainty and oil price

This paper evaluates the information spillover between equity-related uncertainty and the oil price before and after the 2008 global financial crisis, and the effects of exogenous shocks on the pattern of information spillover. In particular, we investigate mean and volatility spillovers between uncertainty and the oil price with and without exogenous shocks by using a bivariate EGARCH model. There are two main findings in our paper. First, the evidence ensures significant information transmission between equity-related uncertainty and the oil price, and shows remarkable differences in transmission patterns before and after the crisis. Second, the results show that exogenous shocks can intensify information transmission between oil prices and uncertainty in terms of both the mean and volatility spillover effects. Moreover, exogenous shocks exhibit direct spillover effects on oil prices.