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Oil Market Shocks and Financial Instability in Asian Countries

Dagher, Leila and Hasanov, Fakhri (2022): Oil Market Shocks and Financial Instability in Asian Countries. Published in: International Review of Economics and Finance , Vol. 84, (March 2023): pp. 182-195.

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Abstract

This paper examines the relationship between oil market shocks and financial instability in Asian countries using a Structural Vector Autoregression (SVAR) following Kilian’s (2009) methodology. Instability in the Asian financial markets is measured by the Financial Stress Index (FSI). Based on impulse response functions, the findings confirm that the source of an oil price shock (supply side or demand side) is extremely important to financial markets. When the oil price increases as a result of oil-specific demand shocks, the financial markets experience less stress. However, when the oil price increases as a result of oil-specific supply shocks, the financial markets experience increased stress. The findings of the study should be useful for international and domestic investors for portfolio diversification and other investment-production purposes, as well as for financial stability regulators and other monetary authorities.

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