Does the source of oil price shock matter for Indian sectoral stock returns? A time-frequency approach to analyse dynamic connectedness and spillovers

ABSTRACT

This paper examines the connectedness and spillovers between decomposed oil shocks and Indian sectoral equities in a time-frequency domain using the most recent Barunik and Krehlik (2018) approach. Our empirical results show that the oil demand shock is the major spillover transmitter across all time horizons followed by the risk shocks; while oil supply shock appears to be a net receiver in all the frequency bands indicating the differential impact of oil shocks. Among the sectors, Basic Materials and Finance receive the highest spillovers from oil shocks in the short-term; while Consumer Discretionary Goods & Services and Industrials join the list in the medium- and long-term. FMCG, Health, Telecom and IT sectors receive the least spillovers in all the bands, making them apt for investments during periods of high volatility. Our empirical results are robust to the application of the alternative TVP-VAR time-frequency parameter framework. The portfolio analysis shows that inclusion of stocks in Oil and sectors like Metal and Telecom significantly reduces the portfolio risk. Dynamic connectedness analysis reveals that the spillovers dramatically increase during times of extreme turmoil, especially during the Global Financial Crisis (2008–2009) and the COVID-19 pandemic. Policy implications of our empirical results are also discussed.

KEYWORDS:

• Oil price shocks
• sectoral equities
• spillover index
• Dynamic connectedness
• Network analysis
• India

JEL CLASSIFICATION:

• E44
• G01
• G11
• Q43

Disclosure statement

No potential conflict of interest was reported by the author(s).

Supplementary data

Supplemental data for this article can be accessed online at https://doi.org/10.1080/00036846.2023.2287552

Correction Statement

This article has been corrected with minor changes. These changes do not impact the academic content of the article.