Page 33 - 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

The findings, summarized in Table 4, reveal nonlinear and regime-dependent causal
relationships between stock market returns, oil prices, energy prices, and exchange
rates, with only a few one-way effects found using conventional linear Granger
causality tests, particularly from exchange rates to stock prices and from oil to stock
prices. However, more connections become apparent when the analysis is extended
even further using the Markov-switching Granger method, especially in situations
with increased volatility. For example, a bidirectional relationship between oil prices
and stock returns is seen during Regime 2, suggesting that during economic downturns
changes in energy markets can both cause and respond to changes in financial
performance, a result that is consistent with research by Chang and Lee (2011) and
Bouoiyour et al. (2017), who found comparable feedback effects during market
turbulence. Changes in portfolios by investors due to shifts in oil prices are often noted
as one of the contributing factors to these movements. Furthermore, the results also
provide evidence of a strong causal relationship between changes in exchange rates
and the stock market across both regimes, indicating support for the “financial
channel” hypothesis developed by Basher and Sadorsky (2006) and reemphasized by
Raifu and Oshota (2023). The evidence suggests that currency depreciation typically
increases pressure on imported inflation, which in turn tends to lower stock values,
while electricity price shocks exhibit relatively weaker causal effects, suggesting that
the transmission mechanism may operate more slowly and vary by location,
supporting the claim made by Apergis and Miller (2009) that short-run financial
effects can be reduced by liberalized energy markets. When considered together, these
results show how cross-market transmission effects are amplified during times of
increased volatility, thus providing additional evidence in favor of the asymmetric
dependence hypothesis, which was first presented by Mork (1989) and then extended
by Bildirici and Badur (2019) using the belief-augmented MS-VAR framework.

Table 5: Findings from the Fixed Effects Panel Quantile Regression
(Panel_QR_FE)
β₂ β₄ β₅ β₆ Adj
Quantile (τ) β₁ Oil β₃ FX
Electricity Renew×Oil FIT×Oil CPO×Oil R²
0.20 (Lower −0.182*** −0.071** +0.049** +0.121*** +0.086** +0.093** 0.42
Tail)
0.40 −0.097** −0.038* +0.036** +0.102** +0.077** +0.084** 0.39
0.50 (Median) −0.064** −0.021 (ns) +0.028* +0.083** +0.059** +0.069* 0.37
−0.038 +0.021
0.60 −0.010 (ns) +0.061** +0.045* +0.052* 0.34
(ns) (ns)
0.80 (Upper −0.011 +0.004 (ns) +0.013 +0.049 (ns) +0.038 +0.040 (ns) 0.30
Tail) (ns) (ns) (ns)

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