Time-varying effects of crude oil and natural gas price shocks on Russia’s financial markets: The roles of financial stress and economic policy uncertainty channels

Abstract The channels of financial stress and economic uncertainty significantly influence the dynamics of risk transmission between natural gas and crude oil price shocks and stock and bond markets. This study employs the TVP-SVAR-SV technique to examine the evolving relationship between various types of energy price shocks, economic policy uncertainty, and changes in the financial stress index. The results indicate that fluctuations in natural gas and oil prices, coupled with uncertainties in the channels, have significant and time-varying effects on bond and stock market returns. Stock market returns exhibit greater sensitivity to energy price shocks than bond market returns during periods of heightened financial stress and economic policy uncertainty. The channels serve as pivotal transmission mechanisms through which energy price shocks influence Russia’s financial markets. The strength and direction of these effects vary depending on the origin of the commodity price shocks and manifest differently across the interconnected channels of energy and financial markets. This study highlights the importance of considering the interplay between energy price shocks and economic policy uncertainty in understanding the dynamics of risk transmission between energy and financial markets. The findings have significant policy implications for investors and government agencies, enabling them to make more informed investment decisions and develop more effective policies to mitigate the impact of energy price shocks on the economy. JEL CLASSIFICATION C230; C440; C580; Q431