Exploring the dynamic effects of financial factors on oil prices based on a TVP-VAR model

The financialization of crude oil has been enhanced since the 2000s, which has built a stronger relationship between oil and other financial assets, and has increased volatility in the crude oil market. In order to investigate the impacts of financial factors on oil prices, we examine the combined effects of the USD, gold, stock market, and speculation in the crude oil futures market on crude oil prices based on monthly data over the period from 1997 to 2016. With the help of the TVP-VAR model, we can identify the time-varying effects of these financial factors on oil prices and can consider these four financial factors simultaneously, which is the primary contribution of this paper. The main findings of our study are as follows. First, the impacts of financial factors on crude oil prices vary over time, and 2008 global financial crisis strengthen the relationship between financial markets and crude oil prices. Second, the USD is the dominant factor affecting oil prices before a crisis but speculation becomes the strongest factor after a crisis, while gold and the S&P 500 index have lesser effects. Our findings provide the evidence for investors to diversify portfolios and manage risk as well as for policymakers to regulate the market. (C) 2019 Elsevier B.V. All rights reserved.