Oil price uncertainty, financial distress and real economic activities: Evidence from China

Li Li, Hongyi Chen and Jingjie Xiang

Pacific-Basin Finance Journal, 2023, vol. 81, issue C

Abstract: This paper studies the transmission of oil price uncertainty (OPU) shock to real economic activities by focusing on the role of financial condition. We find that financial stress is an important link in the propagation of OPU shock based on China’s macro- and firm-level data. We document significant decrease in real economic activities as oil price uncertainty increases by using SVAR, and further suggest that the contractionary effect of oil price uncertainty is more pronounced under high financial stress. Firm-level evidence consistently shows that heightened financial distress cost – resulted from oil price uncertainty – suppresses investments. OPU shock may cause financial distress through mechanisms of credit crunch, firm volatility and exchange rate uncertainty.

Keywords: Oil price uncertainty; Financial distress; Real economy (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:81:y:2023:i:c:s0927538x23001749

DOI: 10.1016/j.pacfin.2023.102103

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