Essays on contagion analysis in a small open petroleum economy

Mahadeo, Scott Mark Romeo

Abstract

This thesis focuses on how the relationships between the financial markets of the small open energy economy of Trinidad and Tobago and relevant foreign markets evolve, under alternative stable and unstable international market conditions. The research consists of three essays on contagion analysis, where each make original contributions to the empirical approaches for testing contagion. Essay 1 proposes the concept of energy contagion, which is defined as the strengthening of correlations in the energy-finance nexus under crisis periods in the crude oil market. To perform energy contagion analysis, financial contagion tests are augmented. Building on this, Essay 2 puts forward a new rule-based specification to filter structural oil market shocks to obtain discrete calm and extreme oil supply, global demand, and oil-specific demand shocks. These identified oil market conditions are used to construct oil market contagion tests on important oil-finance nexus relationships. In Essay 3, the focus is on testing for contagion from the S&P 500 market to the major stock markets of the Caribbean region. This US financial market index is decomposed into various conditions of stability and stress to determine the scenarios during which the US and the Caribbean equity market relationships might deepen. The central consolidated conclusions of the thesis show: (1) A negative interdependence exists between the international crude oil market and the real effective exchange rate of Trinidad and Tobago, which implies currency appreciations (depreciations) when oil prices fall (rise); (2) The correlations between the Trinidad and Tobago stock market and either the crude oil or US stock markets are, in general, insensitive to the developments in these source markets; and (3) Evidence of contagion from external markets to Trinidad and Tobago is primarily contained to the 2008/2009 Global Financial Crisis.

Citation

Mahadeo, S. M. R. (2020). Essays on contagion analysis in a small open petroleum economy. (Thesis). Keele University

• Thesis Type: Thesis
• Publicly Available Date: May 26, 2023
• Keywords: contagion; correlation; crisis; financial markets; oil; Trinidad and Tobago
• Award Date: 2020-06