Nonlinear Causal Relationship between Oil Prices, Global Uncertainty and Investor Sentiments

Abstract

In recent years, as a result of developments in global markets, the financial decision-making mechanism of individuals has become one of the most debated topics. In the literature, despite the fact that linear relationship between energy market and investor sentiment is investigated, usually traditional tests are applied. Further, uncertainty conditions at the global level are not taken into account within the frame of markets and sentiment relations. The relationship between oil prices and investor sentiment is outstanding for asset allocation and portfolio risk management under conditions of uncertainty. This research paper examines the connection between energy market, global uncertainty and investor sentiment using monthly data between 2004 and 2024. In the analysis, firstly, it is examined that whether the series are linear or not employing linearity test. Then, quantile causality test is applied to the series that are determined to be non-linear. Empirical findings provide that investor sentiment cause oil prices while oil prices cause global uncertainty. In addition, global uncertainty and investor sentiment have a mutual causal relationship. Analysis results revealed that investor sentiment significantly affects the energy markets, and there is a strong association between global uncertainty and investment sentiment.