Oil price shocks and emerging stock markets revisited

In this article, we revisit the impact of oil shocks upon the emerging equity markets by using the novel shock decomposition algorithm proposed by Ready (2018). We consider 24 emerging equity markets for the period spanning over July 15, 2002 to June 18, 2018 and bifurcate them on the basis of oil-dependence. To understand the time-varying co-movements between oil prices and stock returns, we use rolling and dynamic conditional correlation analysis. Whereas, the regime and state-specific dependence of stock returns on the oil shocks is captured by the Markov Regime Switching and Quantile Regression models respectively. We find that the demand shocks are positively associated with stock markets, whereas the supply shocks are negatively related with exception to some of the oil-exporting countries. The risk-based shocks also appear to have negative association with stocks. We do not find the evidence of strong regime dependence and the direction of relationship across the high and low regimes are somewhat stable. Further, we find intense oil-stock relationship in the bearish market conditions. Besides, we also report certain evidences of alterations of the oil-stock relationship onset the Global Financial Crisis (GFC) of 2008.