[Paper Review] Coronavirus and oil price crash: A note

Claudiu Tiberiu Albulescu|arXiv (Cornell University)|Mar 13, 2020

Market Dynamics and Volatility12 citations

TL;DR

This paper investigates the impact of COVID-19 cases on crude oil prices, controlling for financial market volatility and U.S. economic policy uncertainty using ARDL estimation. It finds that while new daily infections have only a marginal long-term negative effect on oil prices, the pandemic's amplification of financial volatility drives significant indirect price movements.

ABSTRACT

Coronavirus (COVID-19) creates fear and uncertainty, hitting the global economy and amplifying the financial markets volatility. The oil price reaction to COVID-19 was gradually accommodated until March 09, 2020, when, 49 days after the release of the first coronavirus monitoring report by the World Health Organization (WHO), Saudi Arabia floods the market with oil. As a result, international prices drop with more than 20% in one single day. Against this background, the purpose of this paper is to investigate the impact of COVID-19 numbers on crude oil prices, while controlling for the impact of financial volatility and the United States (US) economic policy uncertainty. Our ARDL estimation shows that the COVID-19 daily reported cases of new infections have a marginal negative impact on the crude oil prices in the long run. Nevertheless, by amplifying the financial markets volatility, COVID-19 also has an indirect effect on the recent dynamics of crude oil prices.

Motivation & Objective

• To examine the long-term relationship between daily reported COVID-19 cases and crude oil prices.
• To assess the influence of financial market volatility on oil price dynamics during the pandemic.
• To control for U.S. economic policy uncertainty as a confounding factor in oil price movements.
• To disentangle direct and indirect effects of the pandemic on oil price fluctuations.

Proposed method

• Employs an Autoregressive Distributed Lag (ARDL) model to estimate long-run relationships between variables.
• Incorporates daily reported COVID-19 cases as a key explanatory variable for oil price changes.
• Includes financial market volatility and U.S. economic policy uncertainty as control variables.
• Uses time-series data from the onset of the pandemic through March 2020 to capture the initial shock period.
• Applies bounds testing to assess cointegration and long-run equilibrium relationships.
• Analyzes the indirect transmission channel through heightened financial volatility.

Experimental results

Research questions

• RQ1 What is the long-term impact of daily new COVID-19 cases on crude oil prices?
• RQ2 How does financial market volatility mediate the effect of the pandemic on oil prices?
• RQ3 To what extent does U.S. economic policy uncertainty influence oil price movements during the pandemic?
• RQ4 Is the effect of the pandemic on oil prices primarily direct or mediated through financial market instability?

Key findings

• The long-run impact of daily new COVID-19 cases on crude oil prices is marginal and negative.
• Financial market volatility significantly amplifies the effect of the pandemic on oil price movements.
• The sharp oil price drop on March 9, 2020, was driven by Saudi Arabia’s market flooding, not solely by pandemic fears.
• The ARDL model confirms a long-run equilibrium relationship between oil prices and the key explanatory variables.
• U.S. economic policy uncertainty contributes to oil price volatility but is not the primary driver of the observed price decline.
• The indirect effect of the pandemic—via increased financial volatility—plays a more substantial role than the direct effect of infection rates.