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Asymmetric impacts of disaggregated oil price shocks on uncertainties and investor sentiment

Syed Jawad Hussain Shahzad (), Elie Bouri (), Naveed Raza () and David Roubaud ()
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Syed Jawad Hussain Shahzad: Montpellier Research in Management
Naveed Raza: Montpellier Research in Management
David Roubaud: Montpellier Research in Management

Review of Quantitative Finance and Accounting, 2019, vol. 52, issue 3, 901-921

Abstract: Abstract This paper aims to examine short- and long-run asymmetries in the impacts of disaggregated oil price shocks on economic policy uncertainty, stock market uncertainty, treasury rates, and investor (bullish and bearish) sentiment in the US. To this end, we use a nonlinear auto-regressive distributed lag cointegration approach, which allows us to capture both positive and negative disaggregated oil shocks. We find that oil demand shocks are the main drivers of both measures of uncertainty, while oil supply shocks affect treasury rates. However, both oil demand shocks and oil supply shocks affect investor sentiment, with certain differences in the effects of positive and negative shocks. The overall effects of both oil demand and supply shocks—whether positive or negative—are stronger in the long-run than in the short-run. Additionally, we apply rolling causality and reveal evidence of a rather homogenous causal flow from disaggregated oil shocks to the variables studied, particularly around global stress periods. Our findings have implications for asset pricing and portfolio risk management and suggest policy formulations that differentiate between disaggregated positive and negative oil price shocks.

Keywords: Oil demand and supply shocks; EPU; VIX; Treasury rates; Investor sentiment; NARDL; Rolling causality (search for similar items in EconPapers)
JEL-codes: C32 G10 Q43 (search for similar items in EconPapers)
Date: 2019
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Handle: RePEc:kap:rqfnac:v:52:y:2019:i:3:d:10.1007_s11156-018-0730-9