Oil price volatility, investment and sectoral responses: the Thai experience

Wadud, I.K.M. and Ali Ahmed, Huson Joher 2016, Oil price volatility, investment and sectoral responses: the Thai experience, Journal of developing areas, vol. 50, no. 3, Summer, pp. 357-379, doi: 10.1353/jda.2016.0097.

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Title Oil price volatility, investment and sectoral responses: the Thai experience
Author(s) Wadud, I.K.M.ORCID iD for Wadud, I.K.M. orcid.org/0000-0003-3846-5615
Ali Ahmed, Huson JoherORCID iD for Ali Ahmed, Huson Joher orcid.org/0000-0002-0186-2564
Journal name Journal of developing areas
Volume number 50
Issue number 3
Season Summer
Start page 357
End page 379
Total pages 23
Publisher Western Illinois University
Place of publication Macomb, Ill
Publication date 2016
ISSN 0022-037X
Keyword(s) Investment
oil price volatility
Summary This paper investigates the nexus between investment and oil price volatility in the context of a developing industrialised economy, Thailand. In the post Asian Crisis era, Thailand has been on a steady phase of recovery with industrial expansion as well as revival of investment and output growth. A significant portion of such growth is attributable to investment growth in metal products, machineries and other transportable goods which are the energy dependent industries. Implicit in these phenomena is the need to further scrutinise the impact of the exogenous shock emanating from uncertainty in oil market on the scale of investment in various sectors of the Thai economy. Using a threshold-based components generalized autoregressive conditional heteroskedasticity (CGARCH) model, the oil price volatility is decomposed into permanent and transitory volatilities. The oil price volatility components are then analysed in a structural vector autoregression (SVAR) framework, along with investment and other key macroeconomic variables. Dynamic impulse response functions obtained from the SVAR model reveal significant dampening effects of the conditional and transitory oil price volatility shocks on Thailand’s aggregate and sectoral level investments. The impulse responses clearly indicate that as the temporary volatility in oil price rises, total investment decreases significantly. At sectoral level, the responses of investments in food and textiles products suggest a significant dampening effect on investments due to shocks in both the conditional and transitory volatilities of oil prices. In contrast, a shock in the permanent volatility leads to only a small decline in investment in this sector, and for only about a quarter. Similar effects were also observed for other transportable goods, consisting primarily of wood products, furniture, and cork, straw and plaiting materials. The investment in the business services sector, which comprises investment in real estate services, does not exhibit any significant effects of shocks in the conditional, permanent and transitory volatilities of oil prices. The findings of this study have important implications for policy. Firstly, since the Thai economy is relatively energy intensive, any dynamic shock emanating from energy market will be detrimental to investment and economic growth. Secondly, the significant and stronger adverse effects of the temporary oil volatility point to the absence of insurance markets for guarding against any volatility risks, or the lack of managerial expertise for identifying and accommodating the negative impacts of a heightened transitory or permanent oil price volatility. Thirdly, firms operating in energy-dependent industries ought to remain vigilant especially in regards to weather adverse impacts of any transitory volatility of oil prices.
Language eng
DOI 10.1353/jda.2016.0097
Field of Research 140202 Economic Development and Growth
150202 Financial Econometrics
150299 Banking, Finance and Investment not elsewhere classified
Socio Economic Objective 970115 Expanding Knowledge in Commerce
HERDC Research category C1 Refereed article in a scholarly journal
ERA Research output type C Journal article
Copyright notice ©2016, Western Illinois University
Persistent URL http://hdl.handle.net/10536/DRO/DU:30090461

Document type: Journal Article
Collections: Department of Economics
Department of Finance
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