ABSTRACT
Research on oil prices has concentrated on demand and supply factors and has largely underestimated the importance of the financialization of commodities. To assess the impact of financial factors on oil prices, this article investigates the liquidity of Brazil, Russia, India, and China (BRIC) and that of a group of four developed economies (G4) consisting of the Eurozone, Japan, the United Kingdom, and the United States. An application of the single-state vector autoregressive (VAR) model to monthly data from the 1999–2020 sample period reveals that a positive shock to the liquidity of the BRIC countries leads to significant increases in real oil prices. These novel findings stem from a consideration of Markov-switching vector autoregressive (MSVAR) models, which shows that an unanticipated increase in the G4 liquidity is positively linked with real oil prices. The main findings are as follows. (1) We identify three regimes that are associated with the volatility of real oil prices and the liquidity measure, including a crisis regime that characterizes the subprime crisis and the COVID-19 pandemic. (2) Impulse response function analyses show that the impact of G4 liquidity under the crisis regime is almost twice as large as that during normal periods, while the impact of BRIC liquidity during such a crisis period is almost three times larger. (3) A shock to BRIC liquidity has a greater impact on real oil prices than a shock to the liquidity of the G4 economies. This analysis helps in assessing the importance of BRIC and G4 liquidity in relation to upsurges in the real oil prices.