Page 21 - Azerbaijan State University of Economics

THE Luan Vardari, Kiran Sood: Sate-Dependent Transmission of Oil and Electricity Shocks to
Equity Markets: Evidence from Emerging and Transitional Economies

1. INTRODUCTION
When considering sustainable finance, a continuing area of interest has been the
interaction between energy markets and financial markets. Macroeconomic stability,
market outcomes, and investor choices are all still impacted by changes in oil prices
and policies supporting the energy transition. The fact that oil price shocks may have
a great impact on stock returns has been discussed in numerous studies since the
seminal work of Kilian and Park (2009) based on the nature of the shock whether
supply shock, demand shock, and precautionary shock and the overall economic
condition of the economy. Recent studies, such as that by Bašić and Bašica (2019)
and Będźmirowska and Będźmirowska (2023), have also reinforced the emerging
significance of examining energy finance interactions in terms of frameworks that
emulate asymmetric and time-varying associations.

Indicatively, Będźmirowska and Bašić (2019) examined the Turkish and the U.S.
markets using the MS-VAR and MS-Granger causality models. Their results showed
that the energy-market variables do not show the same behavior in volatility regimes
and of economic conditions. Oil price shocks in developed economies are likely to
affect the confidence of investors whereas in the emerging market, the effects are
unidirectional reflecting regime-dependent dynamics. Likewise, Bašić, Będziowska,
and Opoha (2023) used a two-step SVAR-Markov-Switching to the stock returns in
Nigeria, they concluded that oil and supply shocks only drive the stock returns during
low-volatility regimes, and the demand-related shocks drive the stock returns during
high uncertainty regimes. Overall, these findings come to one crucial conclusion: the
effect of energy shock and financial performance is never consistent and steady across
time. Building on this foundation, the current study develops a comprehensive
international model designed to explore the diversity and dynamic adaptations of the
energy-finance nexus. The framework uses advanced econometric approaches,
including grapevine pairs for tail dependence, DCC-GARCH models to examine
correlations over time, MS-Greanger causality to test the direction of effects, and a
panel MS-VARX approach to examine regime switching and transmission. The
different approaches are applied to both advanced and emerging markets. To account
for opportunities to moderate impacts, the model incorporates structural responses,
such as renewable energy expansion, feed-in tariff programs, and coal phase-out
programs. In this way, the current study provides a nuanced perspective on how
energy price fluctuations and shocks can affect financial stability, particularly in
economies with different energy intensities.

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