From Oil to Sterling: How Commodity Equity Signals Stabilize Currency Volatility in a Post-Crisis Economy

This paper develops a stochastic model to examine how oil-linked equity prices influence the volatility of the British pound in the aftermath of the 2008 financial crisis. Drawing on behavioral macroeconomic insights and post-crisis empirical data, the study identifies a forward-looking feedback loop whereby oil sector valuations amplify or stabilize currency fluctuations through expectations-driven dynamics. Using a discrete-time stochastic process, we find that oil-related stocks function as automatic stabilizers by internalizing external shocks and moderating exchange rate volatility. These findings bridge the gap between commodity-currency literature and Keynesian macro-financial theory, demonstrating the potential of sector-specific financial instruments to mitigate instability under conditions of uncertainty and hysteresis. JEL Classification. F31, G12, Q43, D84