This study examines the dynamic connectedness among oil price shocks, market sentiment and stock market returns in two distinct economic contexts—India and the United States—over the period from 1 May 2009 to 5 April 2024. To analyse the connectedness, a sentiment index is first constructed using principal component analysis, and the interconnected relationships are then examined by a time-varying parameter vector autoregression model, which captures the evolving nature of shock transmission over time. The empirical results show that global and domestic events significantly influence the direction and strength of connectedness among the variables. In both countries, stock market returns emerge as consistent transmitters of shocks, while demand shocks act as key recipients of volatility. Notably, the transmission pattern of oil price shocks varies by country: Supply shocks dominate in India, whereas risk shocks play a larger role in the United States. These findings reveal structural differences in the transmission mechanisms in the high-income and emerging nations and offer valuable insights for investors and policymakers seeking to tailor strategies based on the economic and financial architecture of each nation.
AdeosunO. A., TabashM. I., & AnagrehS. (2022). Oil price and economic performance: Additional evidence from advanced economies. Resources Policy, 77. https://doi.org/10.1016/j.resourpol.2022.102666
2.
AggarwalD., & MohantyP. (2018). Do Indian stock market sentiments impact contemporaneous returns?South Asian Journal of Business Studies, 7(3), 332–346. https://doi.org/10.1108/SAJBS-06-2018-0064
3.
AlkofahiK., & BousrihJ. (2024). The nexus between oil consumption, economic growth, and crude oil prices in Saudi Arabia. Economies, 12(5). https://doi.org/10.3390/economies12050105
4.
ApergisN., CoorayA., & RehmanM. U. (2018). Do energy prices affect US investor sentiment?Journal of Behavioral Finance, 19(2), 125–140. https://doi.org/10.1080/15427560.2017.1373354
5.
AromiD., & ClementsA. (2019). Spillovers between the oil sector and the S&P500: The impact of information flow about crude oil. Energy Economics, 81, 187–196. https://doi.org/10.1016/j.eneco.2019.03.018
6.
ArshizadehS., GorganiS. H., TaheriP., GivgolM., ShahrokhiS., & AbdalisousanA. (2021). The impact of COVID-19 on oil supply in the short term. Advanced Journal of Science and Engineering, 2(2), 120–135.
7.
BakerM., & SteinJ. C. (2004). Market liquidity as a sentiment indicator. Journal of Financial Markets, 7(3), 271–299. https://doi.org/10.1016/j.finmar.2003.11.005
8.
BakerM., & WurglerJ. (2006). Investor sentiment and the cross-section of stock returns. Journal of Finance, 61(4), 1645–1680. https://doi.org/10.1111/j.1540-6261.2006.00885.x
9.
BakerM., WurglerJ., & YuanY. (2012). Global, local, and contagious investor sentiment. Journal of Financial Economics, 104(2), 272–287. https://doi.org/10.1016/j.jfineco.2011.11.002
10.
BasherS. A., HaugA. A., & SadorskyP. (2012). Oil prices, exchange rates and emerging stock markets. Energy Economics, 34(1), 227–240. https://doi.org/10.1016/j.eneco.2011.10.005
11.
BasherS. A., & SadorskyP. (2006). Oil price risk and emerging stock markets. Global Finance Journal, 17(2), 224–251. https://doi.org/10.1016/j.gfj.2006.04.001
12.
BasuK., EichengreenB., & GuptaP. (2015). From tapering to tightening: The impact of the Fed’s exit on India [Policy Research Working Paper No. 7071]. World Bank Group. http://documents1.worldbank.org/curated/en/872041468044088310/pdf/WPS7071.pdf
13.
Ben-RephaelA., KandelS., & WohlA. (2012). Measuring investor sentiment with mutual fund flows. Journal of Financial Economics, 104(2), 363–382. https://doi.org/10.1016/j.jfineco.2010.08.018
14.
BhattacharjeeA., GaurD., & GuptaK. (2024). Russia–Ukraine war and the impact on Indian economy. Journal of Economic Studies, 51(4), 841–858. https://doi.org/10.1108/JES-03-2023-0136
15.
BirdR., & YeungD. (2010). How do investors react under uncertainty. Pacific-Basin Finance Journal, 20(2), 310–327. https://doi.org/10.1016/j.pacfin.2011.10.001
16.
BjørnlandH. C. (2009). Oil price shocks and stock market booms in an oil exporting country. Scottish Journal of Political Economy, 56(2), 232–254. https://doi.org/10.1111/j.1467-9485.2009.00482.x
17.
BrownG. W., & CliffM. T. (2004). Investor sentiment and the near-term stock market. Journal of Empirical Finance, 11(1), 1–27. https://doi.org/10.1016/j.jempfin.2002.12.001
18.
ChaudharyR., BakhshiP., & GuptaH. (2020). The performance of the Indian stock market during COVID-19. Investment Management and Financial Innovations, 17(3), 133–147. https://doi.org/10.21511/imfi.17(3).2020.11
ChungS. L., HungC. H., & YehC. Y. (2012). When does investor sentiment predict stock returns?Journal of Empirical Finance, 19(2), 217–240. https://doi.org/10.1016/j.jempfin.2012.01.002
21.
CongR. G., WeiY. M., JiaoJ. L., & FanY. (2008). Relationships between oil price shocks and stock market: An empirical analysis from China. Energy Policy, 36(9), 3544–3553. https://doi.org/10.1016/j.enpol.2008.06.006
22.
CorredorP., FerrerE., & SantamariaR. (2013). Investor sentiment effect in stock markets: Stock characteristics or country-specific factors?International Review of Economics and Finance, 27, 572–591. https://doi.org/10.1016/j.iref.2013.02.001
23.
DahitaleghaniN. (2016). Analysis of disruptions in the Gulf of Mexico oil and gas industry and related economic impacts [Doctoral dissertation, Louisiana State University and Agricultural and Mechanical College]. https://repository.lsu.edu/gradschool_dissertations/3967/
24.
De LongJ. B., ShleiferA., SummersL. H., & WaldmannR. J. (1990). Noise trader risk in financial markets. The Journal of Political Economy, 98(4), 703–738. https://doi.org/10.1086/261703
25.
DeeneyP., CumminsM., DowlingM., & BerminghamA. (2015). Sentiment in oil markets. International Review of Financial Analysis, 39, 179–185. https://doi.org/10.1016/j.irfa.2015.01.005
26.
DieboldF. X., & YilmazK. (2014). On the network topology of variance decompositions: Measuring the connectedness of financial firms. Journal of Econometrics, 182(1), 119–134. https://doi.org/10.1016/j.jeconom.2014.04.012
27.
DingZ., LiuZ., ZhangY., & LongR. (2017). The contagion effect of international crude oil price fluctuations on Chinese stock market investor sentiment. Applied Energy, 187, 27–36. https://doi.org/10.1016/j.apenergy.2016.11.037
28.
Doko TchatokaF., MassonV., & ParryS. (2019). Linkages between oil price shocks and stock returns revisited. Energy Economics, 82, 42–61. https://doi.org/10.1016/j.eneco.2018.02.016
29.
DuD., GundersonR. J., & ZhaoX. (2016). Investor sentiment and oil prices. Journal of Asset Management, 17(2), 73–88. https://doi.org/10.1057/jam.2015.39
30.
FilisG. (2010). Macro economy, stock market and oil prices: Do meaningful relationships exist among their cyclical fluctuations?Energy Economics, 32(4), 877–886. https://doi.org/10.1016/j.eneco.2010.03.010
31.
GabauerD., & AntonakakisN. (2017). Refined measures of dynamic connectedness based on TVP-VAR [MPRA Working Paper No. 78282]. University Library of Munich, Germany.
32.
GharibC., Mefteh-WaliS., SerretV., & Ben JabeurS. (2021). Impact of COVID-19 pandemic on crude oil prices: Evidence from Econophysics approach. Resources Policy, 74, 102392. https://doi.org/10.1016/j.resourpol.2021.102392
33.
GuliyevF. (2020). Trump’s ‘America first’ energy policy, contingency and the reconfiguration of the global energy order. Energy Policy, 140. https://doi.org/10.1016/j.enpol.2020.111435
34.
HammoudehS., & ChoiK. (2006). Behavior of GCC stock markets and impacts of US oil and financial markets. Research in International Business and Finance, 20(1), 22–44. https://doi.org/10.1016/j.ribaf.2005.05.008
35.
HanifW., HadhriS., & El KhouryR. (2024). Quantile spillovers and connectedness between oil shocks and stock markets of the largest oil producers and consumers. Journal of Commodity Markets, 34. https://doi.org/10.1016/j.jcomm.2024.100404
36.
HeZ. (2020). Dynamic impacts of crude oil price on Chinese investor sentiment: Nonlinear causality and time-varying effect. International Review of Economics and Finance, 66, 131–153. https://doi.org/10.1016/j.iref.2019.11.004
37.
HoC., & HungC. H. (2009). Investor sentiment as conditioning information in asset pricing. Journal of Banking and Finance, 33(5), 892–903. https://doi.org/10.1016/j.jbankfin.2008.10.004
38.
JawedM. S., DhaigudeA. S., & TaparA. V. (2019). The sectoral effect of demonetization on the economy: Evidence from early reaction of the Indian stock markets. Cogent Economics and Finance, 7(1). https://doi.org/10.1080/23322039.2019.1595992
39.
KahnemanD., & TverskyA. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47(2), 263–292.
40.
KilianL. (2009). Not all oil price shocks are alike: Disentangling demand and supply shocks in the crude oil market. American Economic Review, 99(3), 1053–1069. https://doi.org/10.1257/aer.99.3.1053
41.
KoopG., & KorobilisD. (2014). A new index of financial conditions. European Economic Review, 71, 101–116. https://doi.org/10.1016/j.euroecorev.2014.07.002
42.
KumarA., & LeeC. M. C. (2006). Retail investor sentiment and return comovements. The Journal of Finance, 61(5), 2451–2486. https://doi.org/10.1111/j.1540-6261.2006.01063.x
43.
KumarR., BhatiaP., & GuptaD. (2021). The impact of the COVID-19 outbreak on the Indian stock market: A sectoral analysis. Investment Management and Financial Innovations, 18(3), 334–346. https://doi.org/10.21511/imfi.18(3).2021.28
44.
KumariJ. (2019). Investor sentiment and stock market liquidity: Evidence from an emerging economy. Journal of Behavioral and Experimental Finance, 23, 166–180. https://doi.org/10.1016/j.jbef.2019.07.002
45.
LahianiA., BenkraiemR., MiloudiA., & ShahbazM. (2019). New evidence on the relationship between crude oil consumption and economic growth in the US: A quantile causality and cointegration approach. Journal of Quantitative Economics, 17(2), 397–420. https://doi.org/10.1007/s40953-018-0147-2
46.
LeT. H., & LuongA. T. (2022). Dynamic spillovers between oil price, stock market, and investor sentiment: Evidence from the United States and Vietnam. Resources Policy, 78. https://doi.org/10.1016/j.resourpol.2022.102931
LiS., ZhangH., & YuanD. (2019). Investor attention and crude oil prices: Evidence from nonlinear Granger causality tests. Energy Economics, 84. https://doi.org/10.1016/j.eneco.2019.104494
49.
MadhaviE., & ReddyR. (2018). The effect of Brexit on Indian stock market: An empirical study. IUP Journal of Financial Risk Management, 15(3), 59–71.
50.
MalkielB. G., & FamaE. F. (1970). Efficient capital markets: A review of theory and empirical work. The Journal of Finance, 25(2), 383–417. https://doi.org/10.1111/j.1540-6261.1970.tb00518.x
51.
MaitraD., RehmanM. U., DashS. R., & KangS. H. (2021). Oil price volatility and the logistics industry: Dynamic connectedness with portfolio implications. Energy Economics, 102. https://doi.org/10.1016/j.eneco.2021.105499
52.
NaikP. K., & PadhiP. (2016). National Stock Exchange of India. International Journal of Management Practice, 9(3), 213–237, https://doi.org/10.1504/IJMP.2016.077816.
53.
NandhaM., & FaffR. (2008). Does oil move equity prices? A global view. Energy Economics, 30(3), 986–997. https://doi.org/10.1016/j.eneco.2007.09.003
54.
NarayanP. K., & NarayanS. (2010). Modelling the impact of oil prices on Vietnam’s stock prices. Applied Energy, 87(1), 356–361. https://doi.org/10.1016/j.apenergy.2009.05.037
55.
PandeyP., & SehgalS. (2019). Investor sentiment and its role in asset pricing: An empirical study for India. IIMB Management Review, 31(2), 127–144. https://doi.org/10.1016/j.iimb.2019.03.009
56.
ParkJ., & RattiR. A. (2008). Oil price shocks and stock markets in the US and 13 European countries. Energy Economics, 30(5), 2587–2608. https://doi.org/10.1016/j.eneco.2008.04.003
57.
QadanM., & NamaH. (2018). Investor sentiment and the price of oil. Energy Economics, 69, 42–58. https://doi.org/10.1016/j.eneco.2017.10.035
58.
ReadyR. C. (2018). Oil prices and the stock market. Review of Finance, 22(1), 155–176. https://doi.org/10.1093/rof/rfw071
59.
SahooM. (2021). COVID-19 impact on stock market: Evidence from the Indian stock market. Journal of Public Affairs, 21(4). https://doi.org/10.1002/pa.2621
60.
SihintJ. K., WadhwaniD., & JainA. (2018). Impact of devaluation on India and China. Journal of Management Research and Analysis, 5(1), 27–30. http://jmraonline.com
61.
SmalesL. A. (2017). The importance of fear: Investor sentiment and stock market returns. Applied Economics, 49(34), 3395–3421. https://doi.org/10.1080/00036846.2016.1259754
62.
SpyrouS. (2012). Sentiment changes, stock returns and volatility: Evidence from NYSE, AMEX and NASDAQ stocks. Applied Financial Economics, 22(19), 1631–1646. https://doi.org/10.1080/09603107.2012.671921
63.
SwamyV. (2020). Macroeconomic transmission of Eurozone shocks to India: A mean-adjusted Bayesian VAR approach. Economic Analysis and Policy, 68, 126–150. https://doi.org/10.1016/j.eap.2020.09.008
64.
UhlM. W. (2014). Reuters sentiment and stock returns. Journal of Behavioral Finance, 15(4), 287–298. https://doi.org/10.1080/15427560.2014.967852
65.
VermaR., & SoydemirG. (2009). The impact of individual and institutional investor sentiment on the market price of risk. Quarterly Review of Economics and Finance, 49(3), 1129–1145. https://doi.org/10.1016/j.qref.2008.11.001
66.
VermaR., & VermaP. (2007). Noise trading and stock market volatility. Journal of Multinational Financial Management, 17(3), 231–243. https://doi.org/10.1016/j.mulfin.2006.10.003
67.
YuJ., & YuanY. (2011). Investor sentiment and the mean-variance relation. Journal of Financial Economics, 100(2), 367–381. https://doi.org/10.1016/j.jfineco.2010.10.011
68.
ZakeriB., PaulavetsK., Barreto-GomezL., EcheverriL. G., PachauriS., Boza-KissB., ZimmC., RogeljJ., CreutzigF., Ürge-VorsatzD., VictorD. G., BazilianM. D., FritzS., GielenD., McCollumD. L., SrivastavaL., HuntJ. D., & PouyaS. (2022). Pandemic, war, and global energy transitions. Energies, 15(17). https://doi.org/10.3390/en15176114
69.
ZhaoL. T., XingY. Y., ZhaoQ. R., & ChenX. H. (2023). Dynamic impacts of online investor sentiment on international crude oil prices. Resources Policy, 82. https://doi.org/10.1016/j.resourpol.2023.103506
70.
ZhuH. M., LiS. F., & YuK. (2011). Crude oil shocks and stock markets: A panel threshold cointegration approach. Energy Economics, 33(5), 987–994. https://doi.org/10.1016/j.eneco.2011.07.002
