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Dynamics of crude oil price shocks and major Latin American Equity Markets: A study in time and frequency domains
Author(s) -
Adrangi Bahram,
Chatrath Arjun,
Macri Joseph,
Raffiee Kambiz
Publication year - 2021
Publication title -
bulletin of economic research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.227
H-Index - 29
eISSN - 1467-8586
pISSN - 0307-3378
DOI - 10.1111/boer.12258
Subject(s) - economics , equity (law) , crude oil , vector autoregression , variance decomposition of forecast errors , econometrics , granger causality , structural vector autoregression , financial economics , monetary economics , west texas intermediate , oil price , monetary policy , political science , petroleum engineering , law , engineering
We examine the impact of crude oil price fluctuations on equity markets for four emerging Latin American markets, namely, Argentina, Brazil, Chile, and Mexico. We adopt an approach that examines this relationship in both a time and frequency domains. The co‐spectral analysis confirmed that most of the observable coherence between crude oil and equity returns occurred at relatively short frequencies. The structural vector autoregression (SVAR) results suggest that shocks to crude oil price directed all equity markets into negative territory, though they typically reversed course after approximately twenty‐four months. Although the decomposition of the prediction error variance showed that crude oil prices were weakly exogenous in the SVAR model, in most cases Brazil's equity market may have been responsible for the higher percentage of variations in the remaining indices. The nonlinear Granger causality tests reveal, with the exception of the Merval index, the equity markets under study were responsive to crude oil price shocks.