Oil Prices and Sectoral Stock Returns in the Brics-T Countries a Time-Varying Approach

Abstract

This paper examines the effects of oil prices and exchange rates on sectoral stock returns in the BRICS-T countries over the period from 2 January 2001 to 22 March 2021. Following the estimation of a benchmark linear model, Bai and Perron (2003) tests are carried out to detect possible structural breaks and a state-space model with time-varying parameters is estimated. The results can be summarised as follows. Oil prices have a positive and significant impact on the energy sector in all countries except India; a negative and significant one on the financial sectors of Brazil, Russia, India, and South Africa; a negative one on the transportation sector in India and Turkey, a positive one in Russia, and none elsewhere. The chemicals sector appears to be one of the most heavily affected by oil price fluctuations. The subsamples and time-varying estimates imply that exchange rate returns have a larger influence than oil price returns. Finally, with the exception of Turkey, oil prices have a negative impact on the industrial sector. Because energy-dependent sectors are vulnerable to global volatility, appropriate energy regulations should be implemented to reduce risk.

Keywords: Oil prices, exchange rates, sectoral stock returns, structural breaks, time-varying parameters