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A threshold effect of COVID-19 risk on oil price returns

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  • Sun, Yiguo
  • Li, Delong
  • Suo, Chenyi
  • Wang, Yu

Abstract

Using U.S. data, we investigate how the COVID-19 pandemic influences oil price returns in an asset pricing framework. Unlike earlier studies, we consider a threshold model to allow for the possibility that COVID-19 risk may not play a role until it reaches a certain level. Based on WTI crude oil spot price data from January 2020 to December 2021, our findings show that oil returns significantly decline with the daily number of COVID-19 deaths but only if the daily death toll exceeds approximately 2100. In addition, a more severe COVID-19 pandemic can substantially increase the exposure of oil returns to various systematic risk factors, which has not been documented in previous literature.

Suggested Citation

  • Sun, Yiguo & Li, Delong & Suo, Chenyi & Wang, Yu, 2023. "A threshold effect of COVID-19 risk on oil price returns," Energy Economics, Elsevier, vol. 120(C).
    • Handle: RePEc:eee:eneeco:v:120:y:2023:i:c:s0140988323001160
    DOI: 10.1016/j.eneco.2023.106618
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    Cited by:

    1. Mishra, Brajesh & Ghosh, Sajal & Kanjilal, Kakali, 2023. "Policies to reduce India's crude oil import dependence amidst clean energy transition," Energy Policy, Elsevier, vol. 183(C).

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    More about this item

    Keywords

    COVID-19; Linear asset pricing model; Oil returns; Threshold model;
    All these keywords.

    JEL classification:

    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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