Co-Movement between Oil Shocks, Exchange Rate and Stock Returns : Fresh Evidence from India

This paper examines if there exists dynamic co-movement between oil shocks, exchange rate and stock returns in India during the time period 2005-2021 using the partial and multiple wavelet analysis. We also investigate if the origin of oil shocks matter to such co-movement across different time periods and frequencies. Our results show that stock returns have a stronger comovement with the oil demand shocks followed by the risk shocks and supply shocks, which strengthens around crises periods. We also observe that the comovement is stronger in the medium- and long-terms than in the short-term, which indicates that the comovement is not contagion, but permanent based on macro fundamentals. The multivariate analysis shows that filtering out the impact of exchange rate leads to drastic fall in such co-movement, highlighting the need to incorporate macroeconomic factors also while assessing the co-movement. Results provide cues to the investors for making best investment choices, depending upon the heterogenous effect of oil shocks across different frequencies and time periods. Our results are also useful for the policy makers in the formulation of appropriate policies to insulate the financial market in times of extreme oil swings