A firm-level analysis of the upstream-downstream dichotomy in the oil-stock nexus

In this paper, we query whether the stock prices of nonintegrated firms in the upstream and downstream sectors of the global oil supply chain respond symmetrically to changes in oil prices. This inquiry relates to the “homogenous expectation” assumption among investors and fund managers pertaining to the returns and variances of assets of specialized firms operating in upstream and downstream sectors of the supply chain. Motivated by the Arbitrage Pricing Theory, we formulate a Panel Autoregressive Distributed Lag (PARDL) model, which explains the possible macroeconomic factors in the oil-stock nexus as well as any inherent persistence and heterogeneity effects due to large cross-sections and time. In accordance with the Shin et al. (2014) approach, a Nonlinear Panel ARDL model is also formulated to test for possible asymmetric responses of the nonintegrated oil firms to positive and negative changes in the oil price. Our findings indicate that the stock prices of upstream and downstream firms move in contrasting directions in response to changes in the benchmark crude oil prices in the long-run. Specifically, we show that the stock prices of upstream sector firms increased in response to an increase in oil prices, while the reverse holds for the stock prices of downstream firms. In the short run, returns on the stock of firms in both sectors increase following an increase in oil prices; however, downstream firms’ stock returns decreased in response to negative oil price shocks. The findings further show that both sectors respond differently to episodic changes in market conditions that emanated from the global financial crisis. However, upstream firms show a stronger response to changing market conditions than their downstream counterparts

Constructing geopolitical risk index for Nigeria

We focus on computing the geopolitical risk index (GPRI) for Nigeria, the largest economy in Africa. The country has faced crises, including Boko Haram insurgency, banditry, kidnapping, EndSARS, and regional secession, affecting trade relationships with other countries. Existing GPR indices do not include Africa, hence the need for this effort. The proposed index considers eight prominent Nigerian newspapers and relevant keywords on a daily basis from Jan 1, 2012, to June 19, 2023. We evaluate the predictability of the index by examining its relationship with Nigeria’s currency and stock markets. Our findings reveal a remarkable positive relationship between the rising geopolitical tensions and the volatility of the currency and stock markets. Curbing geopolitical tensions in Nigeria is crucial for financial market stability.https://www.elsevier.com/locate/sciafam2024EconomicsSDG-08:Decent work and economic growt

PALM OIL PRICE–EXCHANGE RATE NEXUS IN INDONESIA AND MALAYSIA

In this study, we extend the literature analyzing the predictive content of commodity prices for exchange rates by examining the role of palm oil price. Our analysis focuses on Indonesia and Malaysia, the two top producers and exporters of palm oil, and utilizes daily data covering the period from December 12, 2011 to March 29, 2021, which is partitioned into two sub-samples based on the COVID-19 pandemic. Relying on a methodology that accommodates some salient features of the variables of interest, we find that on average the in-sample predictability of palm oil price for exchange rate movements is stronger for Indonesia than for Malaysia. While Indonesia’s exchange rate appreciates due to a rise in palm oil price regardless of the choice of predictive model, Malaysia’s exchange rate only appreciates after adjusting for oil price. However, both exchange rates do not seem to be resilient to the COVID-19 pandemic as they depreciate amidst dwindling palm oil price. Similar outcomes are observed for the out-of-sample predictability analysis. We highlight avenues for future research and the implications of our results for portfolio diversification strategies.In this study, we extend the literature analyzing the predictive content of commodity prices for exchange rates by examining the role of palm oil price. Our analysis focuses on Indonesia and Malaysia, the two top producers and exporters of palm oil, and utilizes daily data covering the period from December 12, 2011 to March 29, 2021, which is partitioned into two sub-samples based on the COVID-19 pandemic. Relying on a methodology that accommodates some salient features of the variables of interest, we find that on average the in-sample predictability of palm oil price for exchange rate movements is stronger for Indonesia than for Malaysia. While Indonesia’s exchange rate appreciates due to a rise in palm oil price regardless of the choice of predictive model, Malaysia’s exchange rate only appreciates after adjusting for oil price. However, both exchange rates do not seem to be resilient to the COVID-19 pandemic as they depreciate amidst dwindling palm oil price. Similar outcomes are observed for the out-of-sample predictability analysis. We highlight avenues for future research and the implications of our results for portfolio diversification strategies

Monetary policy implications of the new fiscal regime in Nigeria : a simulation study

In this policy research, we examine the effects of the new fiscal regime [the signing of the new Finance Act 2023, the setup of a tax reform committee, and the removal of fuel subsidy] on the Nigerian economy and its implication for fiscal and monetary policy coordination in Nigeria. We explore these by estimating a macro-econometric model, which comprises a fiscal rule, monetary policy rule, and a Phillips curve relation to simulate the impacts of the regime on fiscal, macro and monetary fundamentals in Nigeria. We find in the model estimation that (a) lower public debts can be achieved faster through a reduction in expenditure than by an increase in revenue, (b) inflation in Nigeria is driven by demand and supply-side factors, (c) the monetary policy instrument does not possess stabilizing power over the economy. The forecasting analyses show that the contractionary fiscal regime that raises the revenue by about 75 per cent will instantaneously clear out the fiscal deficit and lead to significant reductions in public debts but at the cost of higher inflation. We suggest sufficiently reducing the monetary policy rate to the optimal value obtained from the structural model, and coordination of demand management and supply-side policies by both the monetary and fiscal policy authorities in Nigeria.https://www.elsevier.com/locate/sciafhj2024EconomicsSDG-08:Decent work and economic growthSDG-17:Partnerships for the goal

The U.S. Nonfarm Payroll and the out-of-sample predictability of output growth for over six decades

We examine the predictive prowess of the U.S. Nonfarm Payroll (USNFP) for output growth in the U.S. covering over six decades from 1947 to 2021. Using two different measures of output growth (with Gross Domestic Product growth being used for the main analysis and growth in Industrial Production Index for robustness check), our predictability results show that the U.S. Nonfarm Payroll offers some predictive information for output growth in the U.S. and the out-of-sample forecast results equally attest to the superiority of the USNFP-based model over the model that ignores it. Our findings have implications for policy directions in the U.S. and various national and regional governments, multilateral agencies and investors whose economic and financial conditions are directly or indirectly linked with the U.S. economy.http://link.springer.com/journal/111352023-02-13hj2023Economic

CENTRAL BANK INDEPENDENCE AND PRICE STABILITY UNDER ALTERNATIVE POLITICAL REGIMES: A GLOBAL EVIDENCE

In this paper, we explore the connection between Central Bank Independence (CBI) and inflation under alternative political regimes. We formulate a predictive model that accommodates CBI in the analysis of inflation and thereafter we regroup the countries based on the choice of political regimes as well as the level of development. We find that CBI has a statistically significant and negative effect on inflation in countries adopting full democratic and partial autocratic regimes; but are statistically insignificant in countries operating full autocratic and partial democratic regimes. The results leading to this conclusion are robust to different levels of development

Dynamic spillovers between stock and money markets in Nigeria: A VARMA-GARCH approach

This study examines probable dynamic spillover transmissions between the Nigerian stock and money markets using the multivariate volatility framework that simultaneously accounts for both returns and shock spillovers. Based on relevant pre-tests, the VARMA-CCC-GARCH framework is selected and consequently employed to model the spillovers. The study finds significant cross-market return and shock spillovers between the two markets. Thus, a shock to one market is more likely to spill over to the other market. It is also observed that shocks have persistent effects on stock market volatility but transitory effects on money market volatility. In other words, shocks to the money market die out over time while shocks to stock market tend to persist over time. In addition, including lagged own shocks and lagged own conditional variance when forecasting the future volatility of both return series may enhance their forecast performance. An alternative approach proposed by Diebold and Yilmaz (2012) is also employed for robustness and the results are consistent with those obtained from the VARMA-CCC-GARCH model

Improving the predictability of the oil–US stock nexus: The role of macroeconomic variables

In this study, we revisit the oil–stock nexus by accounting for the role of macroeconomic variables and testing their in-sample and out-of-sample predictive powers. We follow the approaches of Lewellen (2004) and Westerlund and Narayan (2015), which were formulated into a linear multi-predictive form by Makin et al. (2014) and Salisu et al. (2018) and a nonlinear multi-predictive model by Salisu and Isah (2018). Thereafter, we extend the multi-predictive model to account for structural breaks and asymmetries. Our analyses are conducted on aggregate and sectoral stock price indexes for the US stock market. Our proposed predictive model, which accounts for macroeconomic variables, outperforms the oil-based single-factor variant in forecasting aggregate and sectoral US stocks for both in-sample and out-of-sample forecasts. We find that it is important to account for structural breaks in our proposed predictive model, although asymmetries do not seem to improve predictability. In addition, we show that it is important to pre-test the predictors for persistence, endogeneity, and conditional heteroscedasticity, particularly when modeling with high-frequency series. Our results are robust to different forecast measures and forecast horizons

Constructing a global fear index for the COVID-19 pandemic

This paper offers two main innovations. First, we construct a global fear index (GFI) for the COVID-19 pandemic to support economic, financial, and policy analyses in this area. Second, we demonstrate the application of the index to stock return predictability using OECD data. The panel data predictability results reveal the significance of the index as a good predictor of stock returns during the pandemic. Also, we find that accounting for “asymmetry” effect and macro (common) factors improves the forecast performance of the GFI-based predictive model for stock returns. With regular updates and improvements of the index, several empirical analyses can be extended to other macroeconomic fundamentals in future research

Technology shocks and the efficiency of equity markets in the developed and emerging economies : a global VAR approach

DATA AVAILABILITY STATEMENT: The GVAR data used in this article can be found on the following link: http://www.econ.cam.ac.uk/people-files/emeritus/mhp1/GVAR/GVAR.html, accessed on 26 January 2023. However, data on technology shocks can be made available upon request from the corresponding author.We tested the connection between technology shocks and the efficiency of equity markets in developed and emerging economies. We augmented the Global Vector Autoregressive (GVAR) database that covers data on 33 developed and emerging markets with the newly constructed data for technology shocks involving two variants, one with 164 countries (GTS-164), and the other, which is more region-specific. covering only Organization for Economic Co-operation and Development (OECD) countries (GTS-OECD). Our analysis was then modeled with GVAR methodology. We found that a one standard positive innovation shock to global technology (GTS-164) raises real equity prices in nearly 70% of the markets considered, and this is sustained over the forecast periods. However, the response of real equity prices to a global-specific technology shock (GTS-OECD) is rather different. While this shock resulted in the immediate rise in real equity prices, it is only transient and dissipated after the third quarter of the forecast horizon in about 85% of these markets. By implication, the efficiency of the real equity market was assured for the region-specific technology shock rather than for the more encompassing measurement that takes account of numerous markets, not minding whether these markets are developed or emerging. In sum, technological shocks seem to have greater impacts on the efficiency of developed (including Euro) markets than other markets.https://www.mdpi.com/journal/jrfmEconomicsSDG-08:Decent work and economic growt