The role of oil price innovations in the oil-financial stress nexus: Evidence from connectedness and TVP-SVAR analysis

• Oil risk shocks are the primary net transmitters of systemic risk to financial markets. • Positive innovations trigger stronger and more persistent spillovers than negative movements. • China consistently acts as a net receiver of financial stress, reflecting its structural oil dependency. • The 2022 energy crisis intensified the transmission of supply shocks compared to the 2020 pandemic. • The propagation of oil price shocks to financial stress is more pronounced in the short run than in the long run. • Financial stress responded more intensely to oil shocks during the COVID-19 pandemic than during the 2022 Russia–Ukraine war. • Oil risk shocks dominated financial stress transmission pre-pandemic, whereas supply and demand shocks emerged as primary transmitters post-COVID-19 We examine the dynamic nexus between oil price shocks and financial stress across four major economies: China, the Euro Area, the UK, and the U.S. We employ the Diebold‒Yilmaz (2014, 2012) connectedness framework and daily data from January 2015 to November 2023 to identify how the origin and sign of oil price shocks drive financial stress and its systemic propagation. Using a two-stage approach, we first map the systemic network using connectedness measures to identify the primary transmitters of risk, and subsequently use a TVP-SVAR-SV framework to capture the time-varying intensity of these innovations during the 2020 pandemic and the 2022 energy crisis. Our results reveal that the strength and direction of spillovers depend upon the shock’s origin, reflecting the increasing financialization of oil markets. While oil supply and demand shocks act predominantly as net receivers, oil risk shocks emerge as the primary net transmitters. We find important asymmetric spillovers, where positive innovations exacerbate system connectedness more than negative movements. Specifically, oil risk shocks are driven mainly by positive innovations, while oil supply and demand shocks briefly transition into net transmitters during periods of downward price volatility. Furthermore, the results of the TVP-SVAR analysis demonstrate that the responses of financial stress are asymmetric and differ across economies. The responses of financial stress after oil price innovations were greater during the COVID-19 pandemic than during the 2022 Russia–Ukraine war, with the most significant effects occurring in the short term. Our findings provide critical insights for policymakers and investors regarding the real-time propagation of financial stress, the financialization of oil markets, and the need for targeted financial stability measures.