The oil price crisis and contagion effects on the Canadian economy

Abstract

Using a multifactor model, this paper investigates industry-level sensitivities to oil price changes and their spillover effects on 11 economic sectors in Canada during the 2014–2016 oil price crisis through a multisector analysis of sectoral equity indices. The three-factor model proposes a benchmark for interdependence between different sectors and examines the contagion effects transmitted via a common factor, a global oil factor, and a factor specific to the domestic oil and gas (O&G) sector during the crisis period. We provide empirical evidence of a strong and positive relationship between the global oil factor and the Canadian equity market. Results show that all sectoral equity portfolios are exposed to the global oil price. Also, though most economic sectoral portfolios experience contagion effects from the global oil market during the crisis period, some sectors show resilience. Finally, we find limited evidence on the effect of shocks originating in the O&G sector on other sectors of the Canadian economy. Our findings have implications for policy makers, managers and investors.