Oil price shocks: the impact on returns, exchange rates, and the role of economic policy uncertainty

  • Nouf Ben Dahmash

Student thesis: Phd


This thesis examines the impact of global oil price shocks on financial markets. Constructing oil price shocks using the state-of-the-art oil market Structural Vector Autoregression (SVAR) model of Kilian and Murphy (2014), it studies the effects of oil price shocks on US industry stock return, explores the role of economic policy uncertainty on influencing stock market responses to oil price shocks, and assesses how interactions between oil price shocks and economic policy uncertainty affects exchange rates. The thesis consists of three essays. The first essay ''The impact of structural oil price shocks on US industry-level returns'' uses an extensive range of industries to examine the effects of global oil price shocks on stock returns. We find that while demand side shocks (flow demand and speculative demand) stimulate industry returns, significant responses to flow supply shocks are generally negative. The harmful effects of flow supply shocks are more pronounced in industries with low oil dependency. We show that the impact of oil price supply shocks on US industry returns is more significant than documented in prior literature. Our findings support recent evidence that oil price shocks affect US stock market sectors through reductions in demand for goods of consumer-oriented industry rather than increasing costs for energy-intensive industries. The second essay ''Nonlinear responses of stock returns in major oil-exporting and oil-importing countries to global oil price shocks and economic policy uncertainty'' considers a panel of 25 of the world's top oil exporters and oil importers to investigate the effects oil price shocks and economic policy uncertainty on stock market returns. We find that in the low policy uncertainty state, returns in oil-exporting markets are positively affected by all oil price shocks. As economic policy uncertainty increases above the threshold, significant responses of stock returns to oil price shocks are limited to flow demand and speculative demand shocks in oil-exporting markets. On the other hand, during normal episodes of economic policy uncertainty stock returns in oil-importing economies appear to respond only to speculative demand shocks and flow demand shocks with the effect of the latter being only weakly significant. In the high policy uncertainty regime, stock returns in oil-importing economies are shown to be strongly sensitive to all oil market innovations. The third essay ''US economic policy uncertainty regimes and the nonlinear relationship between global oil price shocks and exchange rates of major oil-exporting and oil-importing countries'' employs a panel smooth transition regression (PSTR) model with US economic policy uncertainty as the driver of regime transitions to investigate exchange rate responses to global oil price shocks. Consistent with the terms of trade channel, exchange rates of oil exporters appreciate following flow supply and flow demand shocks during periods of low economic policy uncertainty. In periods of high economic policy uncertainty, local currencies of oil exporters are sensitive to demand side innovations while resistant to flow supply shocks. For oil-importing countries, exchange rates are only affected by flow demand shocks during times of low economic policy uncertainty while appreciating following most oil price shocks when economic policy uncertainty is high reflecting portfolio reallocation.
Date of Award1 Aug 2023
Original languageEnglish
Awarding Institution
  • The University of Manchester
SupervisorStuart Hyde (Supervisor) & Sungjun Cho (Supervisor)

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