Oil Price Shocks and Uncertainty: How stable is their relationship over time?

Degiannakis, Stavros and Filis, George and Panagiotakopoulou, Sofia (2018): Oil Price Shocks and Uncertainty: How stable is their relationship over time? Published in: Economic Modelling No. 72 (2018): pp. 42-53.

Abstract

This paper investigates the time-varying relationship between economic/financial uncertainty and oil price shocks in the US. A structural VAR (SVAR) model and a time-varying parameter VAR (TVP-VAR) model are estimated, using six indicators that reflect economic and financial uncertainty. The findings of the study reveal that static frameworks (SVAR) do not show the full dynamics of the oil price shocks effects to the US economic/financial uncertainty. This is owing to the evidence provided by the time-varying framework (TVP-VAR), which convincingly shows that uncertainty responses to the three oil price shocks are heterogeneous both over time and over the different oil price shocks. In particular, uncertainty responses seem to experience a shift in the post global financial crisis period. Thus, the conventional findings that economic fundamentals response marginally, positively or negatively to supply-side, aggregate demand and oil specific demand shocks, respectively, do not necessarily hold at all periods. Rather, they are impacted by the prevailing economic conditions at each time period. The findings are important to policy makers and investors, as they provide new insights on the said relationships.

• Item Type: MPRA Paper
• Language: English
• Keywords: Economic policy uncertainty, financial uncertainty, realized volatility, oil price shock, SVAR, TVP-VAR, US.
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C51 - Model Construction and Estimation; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q4 - Energy > Q40 - General

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