Page 23 - 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

In addition to the psychological factors, oil market trends tend to act as indicator of
confidence in the economy all over the world. Shigeki (2008) and Qadan and Nama
(2018) discovered that the changes in the volatility of the oil-price have a direct impact
on the investor sentiment by forming expectations on inflation, income, and future
economic states. On the same note, the results of Bildirici and Badur (2019) using the
MS-VAR framework also reinforce this correlation, indicating that the magnitude of
the oil-to-confidence effects, as well as their direction, vary across the high- and low-
volatility regime. This implies that when the market is expanding, optimism is likely
to enhance effects of positive oil shocks and in turbulent times; the same shocks are
likely to have weaker or even negative effects. Similar nonlinear dynamics were
pointed out by Chang and Lee (2011), Ivanov et al. (2014), and McMillan (2016),
who all pointed out that such regime-dependent responses are commonly attributed to
transaction-cost asymmetries and the different behavior of informed versus noise
traders. All these studies together point to the fact that investor confidence does not
only play the role of mediating the impact of oil shocks on stock markets but also
serves as a transmitter channel, which differs depending on market conditions and
volatility levels.

2.2. Oil shocks and stock returns: linear and nonlinear evidence
The connections between oil prices and stock markets performance have been a topic
of scholarly interest since time immemorial, but empirical evidence regarding the
connections between the two is not always consistent and sometimes even
inconclusive. The initial research of this kind noted by Kaul and Seyhun (1990) and
Sadorsky (1999) revealed that rises in oil prices are likely to lower stock returns in
oil-importing countries. Conversely, Apergis and Miller (2009) discovered that the
impacts are quite different in the OECD countries, implying that market responses are
in the structure of structural and economic differences. Equally, unidirectional
causality oriented at the influence of the crude-oil volatility on the investor behavior
in China was identified by Ding et al. (2016), and stronger stock market response to
the oil shocks was observed in the post-2008 financial period (Wei and Guo, 2017).
Bildirici and Badur (2019) further elaborated these findings by using a three-regime
MS-VARX model which separates the growth, transition, and contraction phases.
Their findings showed that oil and gasoline stocks have a different impact on the stock
returns: oil prices are largely influenced by the overall supply and demand conditions
worldwide, but gasoline prices which were also more domestically-based illustrated
local tax policies, consumer confidence, and profitability effects. According to these
results, the authors highlighted the importance of price asymmetries to policymakers
in the development of fiscal and energy policy in emerging markets.

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