On the symmetric and asymmetric Granger causal relationship between oil prices and financial stress in six major European countries

Purpose This study aims to examine whether there is a symmetric and asymmetric causality relationship between oil prices and financial stress. Design/methodology/approach The study applies Gregory–Hansen’s (1996) cointegration and Nazlioglu et al.’s (2016) Fourier-Toda-Yamamoto (F-TY) causality approaches to monthly data from six European core economies: Germany, the United Kingdom, France, Italy, The Netherlands and Spain, covering the period 1987:M05-2023:M08. Findings Except for Spain, the authors find a symmetric causality relationship between oil prices and financial stress across the sampled countries in at least one or both directions. Regarding asymmetric causality, the results reveal a feedback causality relationship between positive shocks in financial stress and negative oil price shocks in Germany and France; a unidirectional causality from positive financial stress shocks (heightened financial stress) to negative oil price shocks (sudden price decreases) in Italy and Spain; a one-way causality from negative financial stress shocks to positive oil price shocks (sudden price increases) in the UK; and no causality in The Netherlands. Originality/value This study adds to the body of knowledge in three ways. First, it enriches the limited empirical research on the asymmetric causality relationship between financial stress and oil price shocks. Second, it uses a newly developed Fourier-Toda-Yamamoto (F-TY) causality approach that yields reliable results even for structural breaks. Finally, given the importance of oil as a vital input for six European core economies that import oil, identifying the link with financial stress can provide policymakers and scholars with fresh policy insights and research opportunities.