Energy and Bank Equity Interactions

Abstract

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Oil price shocks harm real output and bank and industrial profit in most oil-importing countries, which has motivated us to investigate the impact of these shocks on the equity performance of banking industries. To fulfill the research objectives, we involve a sample of developed and emerging economies for comparison purposes. The objective of employing the Toda and Yamamoto (Journal of econometrics, 1995, 66 (1), 225–250) causality test is to explore the time-variant relationship between oil prices and banking indices to investigate how oil price shocks affect the performance of country-specific banking industries. In addition, an impulse response function and variance decomposition analysis are utilized to, respectively, examine the time-variant relationship between oil price shocks and macroeconomic factors and the performance of the banking sector. Results vary across different economies in our sample, but the magnitude of oil price impact is relatively significant in the US, the UK, Canada, Japan, Mexico, and Brazil. The findings indicate that oil price rises adversely affect equity bank indices in developed and emerging economics except for Mexico. Notably, our findings show that oil prices and interest rates jointly have significant power in explaining the banking equity variation and suggest that international bank portfolio investors should consider hedging oil price risk.

Keywords

• bank indices
• oil price shocks
• toda-yamamoto causality test
• impulse response function
• variance decomposition bank indices
• variance decomposition JEL classification: Q43, E02, G21