Strategic Commodities' Price Risk and Financial Contagion in Oil and Gas Exporting Countries

Abstract

This study investigates the occurrence of stock market contagion effects stemming from strategic commodities and the United States (U.S.) equity markets to major oil and gas exporting nations amid the COVID-19 and Russian-Ukraine crises. Employing a multi-factor asset pricing model and risks spillover technique, we scrutinize the sensitivities of market returns to these risk factors and the dynamics of shocks transmission among market sensitivities over time. Our findings reveal that these equity markets generally demonstrate positive and variable sensitivities to the three factors, with Canada, UAE, Kuwait and Saudi Arabia experiencing significant periods of negative response to the gas price factor. Notably, the Russian market exhibited the highest responsiveness to the U.S. factor at the outbreak of the Russian-Ukraine war, whereas the Russian market displays the greatest sensitivity to both oil and gas price risks. The degree of shocks propagation among market sensitivities is about 75.8% and is mainly driver by sensitivities to the U.S. market factor in the energy market, followed by the sensitivity of oil prices to the gas market. Policymakers in these nations should be cautious of potential contagion from the US market and these critical commodities, particularly oil, to mitigate any adverse impacts on their economies.