Financial stability in G-20 economies: Asymmetric effects of institutional quality, economic policy uncertainty, and oil price shocks

• The response of FSI to EPU and oil price shocks is examined. • MM-QR and DCCEMG methods are employed. • Institutional quality moderates EPU in reducing FSI. • EPU, oil price demand and risk shock raise G-20′s FSI. • Oil price supply shock and institutional quality reduce FSI of G-20. After the global financial crisis, the tricky interconnectedness among the global financial markets become apparent. We investigate the impact of Economic Policy Uncertainty (EPU), and distinct oil price shocks on the financial stress (FSI) of G-20 to see how financial instability dynamically reacts to these external risks and whether the Institutional Quality (InQ) has any moderating impact on the financial stress of G-20 in presence of these risks. Utilizing a monthly panel dataset from January 2000 to December 2023, we apply the Methods of Moments Quantile Regression (MMQR) and Dynamic Common Correlated Effects Mean Group (DCCEMG) approaches to obtain reliable and robust estimates. Our findings indicate that EPU, volatility in oil price (OVX), oil price demand and risk shocks intensify financial stress, while an increase in oil supply and improved institutional quality alleviate financial stress of G-20. More importantly, we identify that InQ can moderate the impact of EPU on financial stress in G-20 countries. This occurs through mechanisms such as increased policy credibility, regulatory transparency, and institutional checks that reduce market overreaction to uncertain policy environments. While EPU can also moderate oil price shocks impact on FSI of G-20. Notably, countries like China, Japan, and South Korea appear to be resilient to EPU, whereas Germany, Italy and Turkiye are found to be most exposed to oil price demand and risk shocks. This study carries significant policy implications for both market participants and policymakers of G-20.