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Oil price shocks and yield curve dynamics in emerging markets

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  • Cepni, Oguzhan
  • Gupta, Rangan
  • Karahan, Cenk C.
  • Lucey, Brian

Abstract

In a local projections framework, we study the impact of oil price shocks, based on a refined approach to disentangle oil price movements, on the dynamics of the entire yield curve in nineteen emerging economies with different positions on the oil market. Responses of the term structure factors to oil market shocks are shown to differ conditional on not only the underlying sources that drive oil price, but also based on the oil-dependence of these economies. In particular, we find that oil price risk shocks put upward pressure on the level, slope, and curvature of interest rates across the board. Supply-driven shocks in oil markets cause a rise in the level of interest rates in oil-importing economies more significantly, yet the downward impact on yield curve slope is more pronounced in oil-exporting countries. Demand-driven shocks have a significant and persistent upward impact on level factors in oil-importing countries. Furthermore, the effect of precautionary demand shocks on the curvature factor is more pronounced in oil-importing countries vis-à-vis oil-exporters. Significance, direction, and duration of our results may guide monetary policymakers in emerging countries as well as international investors in portfolio and hedging decisions.

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  • Cepni, Oguzhan & Gupta, Rangan & Karahan, Cenk C. & Lucey, Brian, 2022. "Oil price shocks and yield curve dynamics in emerging markets," International Review of Economics & Finance, Elsevier, vol. 80(C), pages 613-623.
    • Handle: RePEc:eee:reveco:v:80:y:2022:i:c:p:613-623
    DOI: 10.1016/j.iref.2022.02.065
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    More about this item

    Keywords

    Emerging markets; Local projections; Oil price; Supply and demand shocks; Yield curve factors;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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