Title:
OIL PRICE VOLATILITY AND ITS IMPACT ON FINANCIAL AND ECONOMIC MARKETS: AN ANALYTICAL STUDY WITH A CASE STUDY OF THE IRAQI ECONOMY AND A COMPARISON WITH SOUTH KOREA

Authors:
Dr. Riyadh Malik Al-Falahi, Iraq

Abstract:
This study aims to examine the causes of global oil price volatility and their subsequent effects on financial markets and the real economy. It focuses on Iraq as a representative rentier economy and compares it with South Korea, a net oil-importing economy. Utilizing a thorough literature review and structural specifications for Autoregressive Distributed Lag (ARDL) and Time-Varying Parameter Vector Auto regression with Stochastic Volatility (TVP-VAR-SV) models, the study analyzes empirical data from the geopolitical conflicts of 2026 [Pesaran et al., 2001; Nakajima, 2011; Bagirov & Mateus, 2024]. The findings reveal that Brent crude prices experienced a significant surge in early 2026, reaching a historic inflation-adjusted shock. Concurrently, the correlation between oil prices and 10-year U.S. Treasury bond yields reached approximately 65%, the highest persistent level since 1990. Iraq's oil revenue losses due to maritime disruptions at the Strait of Hormuz are assessed alongside the parallel market depreciation of the Iraqi Dinar to approximately 1,575 IQD/USD [Mahmoud, 2026]. The study concludes that the duration of shocks dictates macroeconomic outcomes, leaving rentier economies structurally vulnerable compared to institutionally resilient, import-dependent economies [Lee et al., 2025]. It recommends accelerating income diversification, optimizing foreign exchange reserves management, and institutionalizing corporate financial hedging instruments.