The Impact of the Ukrainian War on Stock and Energy Markets: A Wavelet Coherence Analysis

Abstract

This study attempts to examine the existence of interdependencies between specific stock market indices, exchange rates and crude oil for the period January 2021 to July 2022 with daily data. In the period we have chosen, the post-vaccination phase against COVID-19, as well as the war in Ukraine, is covered. The variables selected for this study are RTSI, Eurostoxx, S&P 500, EUR/USD and RUB/USD exchange rates and crude oil prices. The selection of the specific variables was made because they are directly related to the pre-war period that coincides with the post-vaccine period of the pandemic, which allowed us to characterize it as the normal period and to characterize the period of the war in Ukraine that coincides with the energy crisis as the unstable period. In this way, the present study covers the markets of Russia and other developed economies. For empirical purposes, we applied a wavelet coherence approach in order to investigate the possible existence of simultaneous coherence between the variables at different times and scales for all the considered times. The findings of the study reveal the existence of strong correlations between all variables, during different time periods and for different frequencies during the period under review. Of particular interest is the finding that shows that during the crisis period, the RTSI significantly affects both the European and American stock markets, while also determining the evolution of the Russian currency. In addition, it appears that capital constraints in the Russian stock market, combined with increased demand for crude oil, determine the interdependence between RTSI and crude oil. Finally, an interesting finding of the study is the existence of a negative correlation between the US stock index and crude oil in low-frequency bands and the RTSI and Eurostoxx with crude oil for the post-vaccination and pre-war periods in the medium term. These findings can be used by both investors and portfolio managers to hedge risks and make more confident investment decisions. In addition, these findings can be used by policy makers in the planning of regulatory policies regarding the limitations of the systemic risks in capital markets.