The impact of crude oil prices on financial market indicators: copula approach Derya Ezgi Kayalar a , C. Coşkun Küçüközmen b , A. Sevtap Selcuk-Kestel c, ⁎ a Central Bank of the Republic of Turkey, Head Office, Ankara, Turkey b Department of International Trade and Finance, Faculty of Business, Izmir University of Economics, Izmir, Turkey c Institute of Applied Mathematics, Middle East Technical University, Ankara, Turkey abstract article info Article history: Received 10 January 2016 Received in revised form 19 November 2016 Accepted 19 November 2016 Available online 26 November 2016 JEL classification: G1 G01 G12 G15 N50 N70 O50 Oil price changes have varying impacts on the financial indicators of global markets and economies. This study aims to explore the dependence structure between crude oil prices and stock market indices, as well as the exchange rates in a number of economies categorized with respect to their status as developing/emerging markets, and oil importer/exporter countries. Dependence structures in this study are evaluated in considerable depth using copula models. The broad time period covered allows the investigation of the effect of global financial crisis on the mentioned dependence structure. An additional feature of this study is the inclusion of 1 to 30-day analysis to capture the variation of dependence on duration change. To serve these aims, as well as ARIMA and GARCH models, various copula measures are used to illustrate the level of the association. Additionally, a special focus on the Turkish case is given to illustrate its sensitivity to oil prices. We find that exchange rates and stock indices of most oil exporter countries show higher oil price dependency, whereas, emerging oil importer markets are less vulnerable to price fluctuations. Considerable impacts were found for the global crisis and the continuing recent sharp decrease in oil prices. © 2016 Elsevier B.V. All rights reserved. Keywords: Oil prices Stock market indices Exchange rates Copula Emerging markets 1. Introduction Crude oil prices have the potential to affect the economies through three major channels: Firstly, changes in crude oil prices have a pro- found effect on inflation, through changes in production costs, leading to shifts in the supply curve. Secondly, especially for oil-importing countries, changes in oil prices have a significant impact on balance of payments, thus on exchange rates. Finally, price changes affect the total consumption value of a household, causing substitution effects, i.e. a downward shift in demand with increasing prices, and vice versa. Moreover, since inflation and trade balance are both important determi- nants of exchange rates in the medium and long term, oil prices are expected to play an important role in this process. In contrast, short term effects usually originate from financial markets. Crude oil is priced primarily in terms of US Dollars (USD); accordingly, a change in crude oil prices directly affects exchange rates in terms of USD, while changes in crude oil prices are believed to affect stock markets through the channel of expectations. Changes in oil prices lead to changes in production costs in the related sectors, thus affecting the prices of related stocks. Also, consumption and investment levels in the economy follow changes in crude oil prices, resulting in an increase or decrease in overall stock prices, through the effect on expected earnings. In addi- tion, such effects are expected to be more intense in sectors with direct relations with crude oil markets. Another direct result of the relationship between crude oil and financial markets is the volatility in the latter, which is believed to affect financial flows to commodity markets, thus leading to commodity price changes. There has been frequent discussion of the direction of the relation- ship between crude oil prices, and exchange rates and stock indices. Principally, a negative relation is expected between crude oil prices and exchange rates in terms of dollars, and changes in oil prices directly affect domestic currency crude oil prices. Also, it is believed that varia- tions in oil prices originating from the demand side, such as changes in economic growth, are positively related with stock prices, while Energy Economics 61 (2017) 162–173 ⁎ Corresponding author. E-mail addresses: deryaezgi.kayalar@tcmb.gov.tr (D.E. Kayalar), coskun.kucukozmen@ieu.edu.tr (C.C. Küçüközmen), skestel@metu.edu.tr (A.S. Selcuk-Kestel). http://dx.doi.org/10.1016/j.eneco.2016.11.016 0140-9883/© 2016 Elsevier B.V. All rights reserved. Contents lists available at ScienceDirect Energy Economics journal homepage: www.elsevier.com/locate/eneeco