Detection of structural regimes and analyzing the impact of crude oil market on Canadian stock market: Markov regime-switching approach

Purpose This study aims to analyze the impact of the crude oil market on the Toronto Stock Exchange Index (TSX). Design/methodology/approach The focus is on detecting nonlinear relationship based on monthly data from 1970 to 2021 using Markov-switching vector auto regression (VAR) model. Findings The results indicate that TSX return contains two regimes: positive return (Regime 1), when growth rate of stock index is positive; and negative return (Regime 2), when growth rate of stock index is negative. Moreover, Regime 1 is more volatile than Regime 2. The findings also show the crude oil market has a negative effect on the stock market in Regime 1, while it has a positive effect on the stock market in Regime 2. In addition, the authors can see this effect in Regime 1 more significantly in comparison to Regime 2. Furthermore, two-period lag of oil price decreases stock return in Regime 1, while it increases stock return in Regime 2. Originality/value This study aims to address the effect of oil market fluctuation on TSX index using Markov-switching approach and capture the nonlinearities between them. To the best of the author’s knowledge, this is the first study to assess the effect of the oil market on TSX in different regimes using Markov-switching VAR model. Because Canada is the sixth-largest producer and exporter of oil in the world as well as the TSX as the Canada’s main stock exchange is the tenth-largest stock exchange in the world by market capitalization, this paper’s framework to analyze a nonlinear relationship between oil market and the stock market of Canada helps stock market players like policymakers, institutional investors and private investors to get a better understanding of the real world.

Identifying the Asymmetric Channel of Crude Oil Risk Pass-Through to Macro Economy: Based on Crude Oil Attributes

The impact channel of crude oil market risk on the macroeconomy is highly related to oil attributes. This paper uses a stepwise test method with dummy variables to identify the channel effect of commodity market risk as well as financial market risk and explore the characteristics of the channel effect in different periods dominated by different oil attributes. Furthermore, this paper investigates the asymmetric characteristics of the channel effect under the condition of crude oil returns heterogeneity. The empirical results show that: First, commodity market risk, as well as financial market risk plays a channel role in the impact of crude oil market risk on the macroeconomic operation. Second, there is a significant difference in the ability of the commodity market and financial market to cope with shocks of crude oil market risk in periods dominated by different attributes. During the period dominated by the commodity attribute of oil, both commodity market and financial market play the role of “risk buffer”; during the period dominated by dual attributes of oil, the commodity market risk plays the role of “risk buffer”, while the financial market risk plays the role of “magnifier” of the crude oil market risk. Third, the channel effect pattern and degree of commodity market risk and financial market risk are significantly asymmetric.

Measuring the impact of COVID-19 surveillance variables over the international oil market

Coronavirus (COVID-19) has turned to be an alarm for the whole world both in terms of health and economics. It is striking the global economy and increasing the unpredictability of the financial market in several ways. Significantly, the pandemic spread stimulated the social distancing which led to the lockdown of the countries’ businesses, financial markets, and daily life events. International oil markets have accommodated the crude oil prices during the early COVID-19 period. However, after the first 50 days, Saudi Arabia has surged the market with oil, which caused a certain decrease in crude oil prices, internationally. Saudi Arabia is one of the biggest oil reserves in the world. International trade is based on oil reservoirs which in turn, have been significantly dislodged by the pandemic. Therefore, it is crucial to study the impact of COVID-19 on the international oil market. The purpose of this study is to investigate the short-term and long-term impact of COVID-19 on the international oil market. The daily crude oil price data is used to analyze the impact of daily price fluctuation over COVID-19 surveillance variables. The correlation between surveillance variables and international crude oil prices is calculated and analyzed. Consequently, the project will help in stabilizing the expected world economic crises and particularly will provide the implications for the policymakers in the oil market.

Financial stress effects on financial markets: dynamic connectedness and portfolio hedging

PurposeThis paper investigates the impact of financial stress on the dynamic connectedness and hedging for oil market and stock-bond markets of the Gulf Cooperation Council (GCC).Design/methodology/approachThis study uses the wavelet coherence model to examine the interactions between financial stress, oil and GCC stock and bond markets. Second, the authors apply the time–frequency connectedness developed by Barunik and Krehlik (2018) so as to identify the direction and scale connectedness among these markets. Third, the authors examine the optimal weights, hedge ratio and hedging effectiveness for oil and financial markets based on constant conditional correlation (CCC), dynamic conditional correlation (DCC) and Baba-Engle-Kraft-Kroner (BEKK)-GARCH models.FindingsThe authors have found that the correlation between the oil and stock-bond markets tends to be stable in nonshock periods, but it evolves during oil and financial shocks at lower frequencies. Moreover, the authors find that the oil market and financial stress are the main transmitters of risks. The connectedness is mainly driven by the long term, demonstrating that the markets rapidly process the financial stress spillover effect, and the shock is transmitted over the long run. Optimal weights show different patterns for each negative and positive case of the financial stress index. In the negative (positive) financial stress case, investors should have more oil (stocks) than stocks (oil) in their portfolio in order to minimize risk.Originality/valueThis study has gone some way toward enhancing one’s understanding of the time–frequency connectedness between the financial stress, oil and GCC stock-bond markets. Second, it identifies the impact of financial stress into hedging strategies offering important insights for investors aiming at managing and reducing portfolio risk.