Will Oil Price Volatility Cause Market Panic?

Abstract

It is generally known that violent oil price volatility will cause market panic; however, the extent to which is worthy of empirical test. Firstly, this paper employs the TVP-VAR model to analyze the time-varying impacts of oil price volatility on the panic index using monthly data from January 1990 to November 2021. Then, after using the SVAR model to decompose the oil price volatility, this paper uses the PDL model to analyze the heterogeneous impacts of oil price volatility from different sources. Finally, based on the results of oil decomposition, this paper uses the TARCH model to analyze the asymmetric impacts of oil price volatility in different directions. The results show that: (1) oil price volatility can indeed cause market panic, and these impacts exhibit time-varying characteristics; (2) oil price volatility from different sources has different impacts on the panic index, and the order from high to low is oil-specific demand shocks, supply shocks, and aggregate demand shocks; and (3) oil price volatility has asymmetric impacts on the panic index, and positive shocks have greater impacts than negative.