Oil Shocks and Financial Systemic Stress: International Evidence

Abstract

By conducting a structural VAR analysis on the financial systemic stress in 20 countries, this paper provides international evidence that oil structural shocks impact not only stress in individual financial markets but also their connectedness. The oil structural shocks explain a large fraction of the variation in the connectedness among various financial markets. The effect of oil structural shocks on financial systemic stress is largely dependent on the origins of oil price changes and a country's net oil export position. In most oil importing economies, financial systemic stress is negatively impacted by supply and aggregate demand shocks and positively impacted by oil-market specific demand shocks. Opposite patterns are detected in oil exporting economies. The effects of the spillovers are asymmetrically related with market conditions: During normal periods, more risks are spilled over from the oil market to financial systems, but during financial crises, the opposite occurs. In periods of financial crises and oil price collapses, there is noticeable contagion between the oil market and financial systems.

Keywords: Oil structural shocks; Financial systemic stress; CISS; Structural VAR; Spillover