Symmetric and asymmetric GARCH estimations of the impact of oil price uncertainty on output growth: evidence from the G7

Rasheed O Alao; Abdulkareem Alhassan; Saheed Alao; Ifedolapo O Olanipekun; Godwin O Olasehinde-Williams; Ojonugwa Usman

doi:10.1007/s12076-023-00325-z

Symmetric and asymmetric GARCH estimations of the impact of oil price uncertainty on output growth: evidence from the G7

Lett Spat Resour Sci. 2023;16(1):5. doi: 10.1007/s12076-023-00325-z. Epub 2023 Feb 25.

Authors

Rasheed O Alao¹, Abdulkareem Alhassan², Saheed Alao³, Ifedolapo O Olanipekun⁴, Godwin O Olasehinde-Williams⁵, Ojonugwa Usman⁵

Affiliations

¹ Department of Economics, University of Abuja, Abuja, Nigeria.
² Department of Economics, Federal University of Lafia, Lafia, Nigeria.
³ Department of Pure and Applied Mathematics, Ladoke Akintola University of Technology (LAUTECH), Ogbomoso, Nigeria.
⁴ Department of Economics, Adeyemi Federal University of Education, Ondo, Nigeria.
⁵ Economics and Finance Application and Research Center, Department of Economics, Istanbul Ticaret University, Istanbul, Turkey.

Abstract

Crude oil is an essential source of energy. Without access to energy, output growth is impossible. As a result of this link, volatility in oil prices has the ability to induce fluctuations in the output of both developed and developing economies. Moreover, factors such as business cycles and policy changes often introduce nonlinearity into the transmission mechanism of oil price shocks. This study therefore examines not only the interconnectedness of oil price volatility and output growth, but also the nonlinear, asymmetric impact of oil price volatility on output growth in the countries making up the Group of Seven. To this end, monthly data on West Texas Intermediate oil price and industrial production indices of the Group of Seven countries over the period 1990:01 to 2019:08 is used for empirical analysis. The study employs the DCC and cDCC-GARCH techniques for symmetric empirical analysis. The asymmetric empirical analysis is also conducted via GJR-GARCH, FIEGARCH, HYGARCH and cDCC-GARCH techniques. The findings reveal disparities in the magnitudes of the positive and negative (asymmetric) effects of oil price shocks on output growth. The results also reveal that past news and lagged volatility have a significant impact on the current conditional volatility of the output growth of the Group of Seven countries. The study concludes that the impact of oil price volatility on output growth in the selected economies is asymmetric, the volatility is highly persistent and clustered, and the asymmetric GARCH models outperform the symmetric GARCH models.

Keywords: Asymmetric GARCH; G7; Industrial production index; Oil prices; Symmetric GARCH.

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