Wavelet based analysis of oil price shocks, exchange rate and stock market behaviour: Evidences from emerging markets

• Published date: 01 September 2023
• Author: Amrita Kaur,Prabhat Mittal
• Date: 01 September 2023
• DOI: http://doi.org/10.1111/opec.12277

wileyonlinelibrary.com/journal/opecOPEC Energy Rev. 2023;47:163–175. 163

 | INTRODUCTION

The efficiency and stability of the financial system of an economy are determined by the robust financial markets and

the various microeconomic variables in the system. International crude oil prices are highly volatile subject to demand

and supply in a country. The prices are of significant interest to policymakers and investors and are gaining importance

in the world's economy as a whole and to some particular economies in particular (Basher & Sadorsky,2006; Hawaldar

etal.,2020; Ingalhalli etal.,2016; Jacob & Kattookaran,2019; Kumar & Patel,2019). One of the commodities that finan-

cial professionals and market participants trade the most fiercely is crude oil. It is a complex variable for academicians

to model the time series due to irregularity, non-linearity and non-stationary nature of the data (Manoj & Suresh,2019;

Nikita etal.,2017; Ur Rahiman & Kodikal,2019).

An upsurge in oil prices certainly impacts the global economy through employment (Doǧrul & Soytas,2010; Uri,1996),

rising inflation, the shrinking value of the dollar, all of which lead to a slowdown in the economy (Doǧrul & Soytas,2010;

Papapetrou,2001). Stock markets across the world are affected due to a substantial increase or decrease in the prices of

crude oil (Bagchi etal.,2016). India stands third in the list of largest importers of crude oil across the globe and consumes

1Shaheed Bhagat Singh College (Eve.),

University of Delhi, New Delhi, India

2Satyawati College (Eve.), University of

Delhi, New Delhi, India

Correspondence

Prabhat Mittal, Satyawati College (Eve.),

University of Delhi, New Delhi, India.

Email: p.mittal@satyawatie.du.ac.in

Abstract

During the second quarter of 2020, with an impact of novel coronavirus (COVID-

19), the oil sector has witnessed the most volatile phase of our economic history.

Liquidity in the market became extremely tight and significantly impacted the

stock markets. The study primarily aims at investigating the interdependence of

the crude oil prices, Nifty50 Index and USDINR exchange rates. Wavelet coher-

ence plots are employed to examine the interdependence of oil prices with Nifty

and exchange rates and to analyse the time series information at different times

and frequencies. The results also report the existence of long-run relations using

Johansen's cointegration test and vector error correction model. Moreover, the

shocks in one variable have been noticed with a persistent and prolonged effect

on other variables. However, the results explain that these shocks have short-

term effects, but in the long run, the market becomes stable. The policymakers

should create regulations that protect investors' desire to profit and lessen their

exposure to unanticipated shocks in the market. The study would assist inves-

tors in analysing and comprehending the effects of the abrupt volatility brought

on by lockdown during the pandemic on the stock market.

ORIGINAL ARTICLE

Wavelet based analysis of oil price shocks, exchange rate

and stock market behaviour: Evidences from emerging

markets

Amrita Kaur1| Prabhat Mittal2

DOI: 10.1111/opec.12277

© 2023 Organization of the Petroleum Exporting Countries.