Effect of global oil shocks on the sectoral returns

Purpose This study examines the effects of global oil shocks on sectoral returns during the Pakistani market’s bearish, normal and bullish behavior by controlling VIX and SP500. Design/methodology/approach We analyze daily sectoral return data from the Pakistan Stock Exchange, covering the period from January 2, 2012, to February 17, 2022. Oil shocks are classified into demand, risk and supply shocks using Ready (2018) methodology, distinguishing their unique characteristics and importance. We utilize quantile regression to evaluate how these oil shocks affect sectoral returns, considering market dynamics. Additionally, we employ the Granger causality test to validate our findings. Findings The quantile regression results indicate that the effects of oil shocks on each sector are heterogeneous and significant during both bullish and bearish market phases. Specifically, supply shocks demonstrate a more substantial influence than other shocks, consistent with Kilian’s (2009) findings. Furthermore, the Granger causality test outcomes, conducted after removing control variables, reinforce our findings. Practical implications This study offers evidence that aids investors in understanding how shocks affect sectoral returns. Additionally, it provides insights for policymakers to develop policies that respond effectively to market fluctuations caused by these shocks. Originality/value This study holds value for researchers investigating the causes of shocks and their implications for the stock market. Moreover, the insights from this study, focusing on the Pakistani market, could provide a fundamental reference for other oil-dependent nations aiming to mitigate the impacts of global oil price volatility.