The Effects of COVID-19 Pandemic on Oil Prices, CO ₂ Emissions and the Stock Market: Evidence from a VAR Model

Abstract

This paper examines the impact of COVID-19 pandemic on oil prices, CO2 emissions and stock market volatility over the period January 22, 2020 – March 30, 2020 using an unrestricted VAR. We demonstrate that although the increasing number of COVID-19 infections causeda decrease in the price of crude oil, the negative response of the oil market is short-lived.However, the response of economic activities as measured by CO2 emissions to a shock on COVID-19 infections is negative throughout the forecast period. Also, we find that the current situation created by COVID-19 led appears to have had a stronger impact on equity market volatility than on crude oil prices and CO2 emissions. Lastly, we find that the share of forecast error variance in the level of CO2 emissions is stronger than that of the energy and stock markets. Taken together, our findings shed light on the need for economic intervention to speed up recovery and boost investor’ perception of long-term growth.

Keywords: Oil price; COVID-19; CO2 emissions; financial volatility; VIX

JEL Classification: G1; Q2; Q4