Page 35 - 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

VARX model, research showed there is a complex and regime-dependent relationship
that exists between energy prices, exchange rates, and stock market performance.

The research findings confirm that energy variables and market return indeed have a
nonlinear relationship, however it varies depending on the state of the market. This
was corroborated by the findings in the works of Bildirici and Badur (2019) and Raifu
and Oshota (2023). For example, during periods of high volatility, oil price shocks
were generally viewed negatively in terms of their impact on stock market
performance, but calmer market conditions provided little to no negative effects, and
at times even positive momentum in stock markets. This asymmetry is congruent with
the transmission hypothesis posited by Mork (1989) and later extended by Wang et
al. (2013) and Bouoiyour et al. (2017). These findings illustrate how market
conditions and investor sentiment can influence how energy shocks impact financial
decisions. The research further illustrates the rising significance of electricity pricing
in understanding financial markets response, which is a previous underinvestigated
aspect. The effect of changes in electricity price is country dependent based on the
energy structure. Countries that rely on fossil fuel generate a stronger negative effect
while countries with renewable sources are more resilient. This is in accordance with
the energy diversification framework of Le and Chang (2015) and further supported
with Dhaoui et al. (2018). In addition to this, the changes in the exchange rate
intensified the impact of oil shocks, especially when the domestic currency
depreciates as per results in Raifu and Oshota (2023) and Basher et al. (2016).

One of the major contributions of this research is the identification of policy buffers
that can help stabilize the energy-finance relationship. This study found that green
transition instruments including feed-in tariff (FIT) programs, coal phase out plans
(CPO), and increased financing of renewable energy are associated with careful
reductions of systemic financial risk. These issues align with Apergis and Payne's
(2014) sustainability arguments that renewable energy provides long-term economic
stability and Mokni's (2020) claims that the establishment of renewable energy
mitigates contagion effects in oil-reliant economies. Additionally, in terms of the
quantile regression results, the stabilizing effects occur mostly in the lower quantiles
of the return distribution (τ = 0.2-0.4), where the downside risks are concentrated. The
findings provide evidence that energy transition policies and financial stability are
tightly linked to each other. Economies that promote renewable energy and
diversification tend to be better insulated from macro-financial instability and oil price
shocks than economies with more reliance on fossil fuels, which suffer more
vulnerability and longer downturns during global disruptions. Thus, this empirical
evidence confirms the existing theoretical proposition of sustainable finance made by

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