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

Abstract

AbstractDuring 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 coherence 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 investors in analysing and comprehending the effects of the abrupt volatility brought on by lockdown during the pandemic on the stock market.