A threshold effect of COVID-19 risk on oil price returns

Using U.S. data, we investigate how the COVID-19 pandemic influences oil price returns in an asset pricing framework. Unlike earlier studies, we consider a threshold model to allow for the possibility that COVID-19 risk may not play a role until it reaches a certain level. Based on WTI crude oil spot price data from January 2020 to December 2021, our findings show that oil returns significantly decline with the daily number of COVID-19 deaths but only if the daily death toll exceeds approximately 2100. In addition, a more severe COVID-19 pandemic can substantially increase the exposure of oil returns to various systematic risk factors, which has not been documented in previous literature.

Automated summary

Using U.S. data, this study examines the impact of the COVID-19 pandemic on oil price returns within an asset pricing framework. Unlike previous research, a threshold model is employed to account for the possibility that COVID-19 risk may not be significant until it exceeds a certain level. Findings based on WTI crude oil spot price data from January 2020 to December 2021 indicate that oil returns decline significantly with the daily number of COVID-19 deaths, but only if the daily death toll surpasses around 2100. Furthermore, a more severe COVID-19 outbreak can greatly increase the exposure of oil returns to various systematic risk factors, a phenomenon not previously documented in the literature.