Page 22 - Azerbaijan State University of Economics

THE JOURNAL OF ECONOMIC SCIENCES: THEORY AND PRACTICE, V.83, # 1, 2026, pp. 20-39

2. LITERATURE REVIEW
For decades, changes in energy prices have been identified as a significant contributor
to the determination of asset values and overall macroeconomic activity. A number of
authors have emphasized that fluctuations in oil and electricity prices influence
investor attitudes, inflation expectations, and production costs, all of which contribute
to economic stability. After the oil shocks of the 1970s, the literature began to focus
increasingly on how shocks to oil prices were passed onto to the financial markets via
some combination of changes in supply and demand or changes in expectations
(Hamilton, 1983; Kilian, 2009). Bildirici and Badur (2019) and Raifu and Oshota
(2023) are making two important contributions to this field with unique but
complementary points of view. Bildirici and Badur (2019) study the impacts of the oil
and gasoline prices on the investor confidence and stock returns through the
implementation of a Markov-Switching Vector Autoregressive (MS-VAR) model that
considers the state-dependent dynamics. Conversely, Raifu and Oshota (2023) use
two stage Structural VAR with a Markov switching model to bring the one-sided
impact of disaggregated oil shocks on the stock market in Nigeria. Both articles go
beyond the classical linear causality models, whereby it is stressed the significance of
nonlinear and regime-sensitive models to explain the relationship between energy and
financial markets. These works, collectively, demonstrate that there has been a
methodological development since the simple causality schemes to more complex
models able to explain regime change in the economy and the heterogeneous reactions
of markets. Such accumulating literature highlights the importance of more thorough
studies of the energy-finance nexus particularly in situations with dissimilar market
structures and energy reliance among nations.

2.1. Energy prices, investor sentiment, and stock performance
Investor sentiment and confidence have been widely recognized as behavioral
mechanisms linking macro shocks to asset markets. Early empirical studies (Brown
& Cliff, 2004; Lemmon & Portniaguina, 2006; Baker & Wurgler, 2006, 2007)
established that investor optimism drives speculative pricing and that excessive
sentiment precedes market corrections. Bildirici & Badur (2019) extend this literature
by integrating economic confidence indices into the MS-VAR structure for Turkey
and the U.S., demonstrating that energy-price shocks alter investor mood and
consequently equity valuations. They found a bidirectional relationship between oil
price and confidence in the U.S., but only a unidirectional effect in Turkey an
asymmetry attributed to differences in market maturity and energy dependence. These
results are consistent with Schmeling (2009) and Beckmann et al. (2011), who showed
that confidence levels co-move with short-term returns, especially in emerging
markets, and with Zouaoui et al. (2011), who observed that sentiment indices predict
crises in integrated global markets.

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