Abstract: The literature has been analysing so far the response of the stock market to a distress scenario for oil prices considering prices in domestic currency. This assumption implies merging commodity risk and exchange rate risk. This article proposes to generate oil-related scenario depending on the source of risk. The same distress oil-related scenario in euros could generate an opposite impact on the European stock market depending on the source of risk. Results show higher losses for Eurostoxx when oil prices in euros experience a downward movement due to a decrease of oil price in US dollars and when oil prices in euros experience an upward movement due to a depreciation of the euro against the US dollar. This framework can improve our understanding of how the exchange rate interacts in global markets. Also, it contributes to the design of tailor-made international scenarios for stress testing.
Energy Economics
Volume 89, June 2020, 104776
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