Time-varying effects of oil price shocks on financial stress: Evidence from India

The emergence of crude oil as an essential portfolio asset warrants an in-depth examination of the nexus between oil shocks and financial stress. This paper identifies and analyses the impact of oil supply shocks, demand-specific oil shocks and risk-related shocks on financial stress in a multivariate time series model with time-varying coefficients and a variance-covariance matrix. The empirical results show that the underlying shocks affect the financial sector differently. The oil supply shocks, in general, do not impact financial stress significantly. However, the results of expected demand shocks exhibit interesting patterns. The shocks emanating from expected demand minimise financial stress in both short and long time horizons. The risk-related shocks captured by the CBOE volatility index indicate the worsening of financial stress when market risk rises, and investors' sentiments deteriorate. The empirical results in this study validate the financialisation of crude oil. •Examines the time varying impact of oil shocks on financial stress in the Indian context•Oil shocks are decomposed into supply specific and expected demand shocks•The oil supply shocks, in general, do not impact financial stress significantly.•The expected demand shocks minimise financial stress in both short and long time horizons.•The empirical results provided in this study validate the financialisation of crude oil.