When Oil Moves the Market: Asymmetric Tail Effects of Oil Price Shocks on Stock Returns in Major Oil-Producing Countries

Abstract

This study investigates how oil price shocks influence stock market performance in major oil-producing countries, with a focus on extreme-tail dynamics over the period January 2019 to November 2024. Employing an advanced extension of the Multi-Threshold Nonlinear Autoregressive Distributed Lag (MTNARDL) model, oil price shocks are decomposed into five partial sums based on extreme threshold boundaries, allowing for the identification of distinct impacts stemming from demand, supply, and risk-driven shocks. The results reveal strong asymmetric effects: extreme negative demand shocks significantly depress stock returns, while extreme positive shocks tend to have weaker or insignificant impacts. Additionally, risk-related oil shocks exert substantial influence across most of the markets examined. These findings demonstrate that stock markets in major oil-producing countries are closely linked to oil price fluctuations, regardless of whether these originate from demand, supply, or risk factors. The results carry important implications for investors and policymakers, underscoring the need for economic diversification, particularly in less developed oil-producing economies, in order to reduce vulnerability to oil-related volatility. By introducing an extreme-tail modeling framework, this paper contributes to the literature on financial market responses to energy price shocks and provides valuable insights for managing oil-driven market risks.