The Impact of Oil Price Shocks on Turkish Sovereign Yield Curve

The Impact of Oil Price Shocks on Turkish Sovereign Yield Curve

21/04

Oğuzhan Çepni, Selçuk Gül, Muhammed Hasan Yılmaz, Brian Lucey

English

February 2021

This paper investigates the impact of oil price shocks on Turkish sovereign yield curve factors. The recent oil shock identification scheme of Ready (2018) is modified by using geopolitical oil price risk index in order to capture the changes in the risk perceptions of oil markets driven by geopolitical tensions such as terrorism, conflicts and sanctions. The modified identification scheme attributes more power to demand shocks in explaining the variation of the oil price. Furthermore, our findings demonstrate that the various oil price shocks influence the yield curve factors quite differently. A supply shock leads to a statistically significant increase in the level factor. This result shows that elevated oil prices due to supply disruptions are interpreted as a signal of surge in inflation expectations since the cost channel prevails. Moreover, unanticipated demand shocks have a positive impact on the slope factor as a result of the central bank policy response for offsetting the elevated inflation expectations. Overall, our results provide new insights to understand the driven forces of yield curve movements that are induced by various oil shocks in order to formulate appropriate policy responses.

Emerging markets, Local projections, Oil price, Supply and demand shocks, Yield curve factors, Geopolitical oil price risks

E43; E44; G12; G15; Q43