Page 28 - Azerbaijan State University of Economics

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

(b) Markov Switching Granger Causality (MS GC)
Following Fallahi (2011) and Bildirici (2019), nonlinear causality tests were
performed within each identified regime:

( )
( )
: 12 = 0vs. : 12 ≠ 0,
1
0

( )
where measures lagged spillovers from oil (or electricity) to stock returns in
12
regime . The test distinguishes directionality of transmission (OIL → STOCK, ELEC
→ FX, STOCK ↔ CONFIDENCE).

(c) Volatility and Dependence Layer
To track short run co movements, Dynamic Conditional Correlation (DCC GARCH)

models (Engle, 2002) were estimated for the vector ( , , , , , ). Time
,
varying correlations ρ_t highlighted contagion during stress periods.
Tail co movements were modeled via vine copulas (Patton, 2006) using Student t and
Clayton specifications to capture lower tail dependence.

(d) Policy Response Panel Model
Finally, a fixed effects regression evaluated how renewable energy progress and
policy dummies moderate financial sensitivity:

STOCK , = + OIL + ELEC , + FX , + (OIL × RENEW )

1
2
3
4
,

+ (OIL × FIT ) + (OIL × CPO ) + .
6
,

,

5
,

Robust standard errors clustered by country were employed. Interaction terms test
whether greener policies cushion oil price pass through.

3.4 Conceptual Framework of Energy–Finance Transmission
Figure 1 summarizes the transmission channels modeled in this study. Oil price shocks
influence electricity prices, which subsequently affect exchange rates and stock
returns. The overall magnitude of transmission varies across volatility regimes (low
vs. high). The transmission forces of different volatility regimes differ, such that they
often become weaker during periods of market turmoil and stronger during periods of
stability. Policy measures aimed at stabilizing the financial system and preventing the
spread of market contagion encompass the like of the Coal Phase-Out (CPO), the
Feed-in Tariff (FIT), and the Share of Renewable Energy. These act as the buffer by
absorbing part of the shock of external shocks and stopping the propagation of
financial instability.

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