Advanced Search
MyIDEAS: Login to save this article or follow this journal

The effects of crude oil shocks on stock market shifts behaviour: A regime switching approach

Contents:

Author Info

  • Aloui, Chaker
  • Jammazi, Rania

Abstract

In this paper we develop a two regime Markov-switching EGARCH model introduced by Henry [Henry, O., 2009. Regime switching in the relationship between equity returns and short-term interest rates. Journal of Banking and Finance 33, 405-414.] to examine the relationship between crude oil shocks and stock markets. An application to stock markets of UK, France and Japan over the sample period January 1989 to December 2007 illustrates plausible results. We detect two episodes of series behaviour one relative to low mean/high variance regime and the other to high mean/low variance regime. Furthermore, there is evidence that common recessions coincide with the low mean/high variance regime. In addition, we allow both real stock returns and probability of transitions from one regime to another to depend on the net oil price increase variable. The findings show that rises in oil price has a significant role in determining both the volatility of stock returns and the probability of transition across regimes.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.sciencedirect.com/science/article/B6V7G-4W04KK3-1/2/9449b756df9a21a4f2b759d2740261dc
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by Elsevier in its journal Energy Economics.

Volume (Year): 31 (2009)
Issue (Month): 5 (September)
Pages: 789-799

as in new window
Handle: RePEc:eee:eneeco:v:31:y:2009:i:5:p:789-799

Contact details of provider:
Web page: http://www.elsevier.com/locate/eneco

Related research

Keywords: Markov-switching EGARCH model Oil shocks Stock markets International crises;

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Sadorsky, Perry, 2006. "Modeling and forecasting petroleum futures volatility," Energy Economics, Elsevier, Elsevier, vol. 28(4), pages 467-488, July.
  2. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, Econometric Society, vol. 57(2), pages 357-84, March.
  3. Raymond, Jennie E & Rich, Robert W, 1997. "Erratum [Oil and the Macroeconomy: A Markov State-Switching Approach]," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 29(4), pages 555, November.
  4. Hans-Martin Krolzig & Michael P. Clements, 2002. "Can oil shocks explain asymmetries in the US Business Cycle?," Empirical Economics, Springer, Springer, vol. 27(2), pages 185-204.
  5. Nandha, Mohan & Faff, Robert, 2008. "Does oil move equity prices? A global view," Energy Economics, Elsevier, Elsevier, vol. 30(3), pages 986-997, May.
  6. Sadorsky, Perry, 2001. "Risk factors in stock returns of Canadian oil and gas companies," Energy Economics, Elsevier, Elsevier, vol. 23(1), pages 17-28, January.
  7. Lawrence R. Glosten & Ravi Jagannathan & David E. Runkle, 1993. "On the relation between the expected value and the volatility of the nominal excess return on stocks," Staff Report, Federal Reserve Bank of Minneapolis 157, Federal Reserve Bank of Minneapolis.
  8. Robert B. Barsky & Lutz Kilian, 2004. "Oil and the Macroeconomy Since the 1970s," Journal of Economic Perspectives, American Economic Association, vol. 18(4), pages 115-134, Fall.
  9. Garcia, R. & Perron, P., 1990. "An Anlysis Of The Real Interest Rate Under Regime Shifts," Papers, Princeton, Department of Economics - Econometric Research Program 353, Princeton, Department of Economics - Econometric Research Program.
  10. Lamoureux, Christopher G & Lastrapes, William D, 1990. "Persistence in Variance, Structural Change, and the GARCH Model," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 8(2), pages 225-34, April.
  11. Henry, Ólan T., 2009. "Regime switching in the relationship between equity returns and short-term interest rates in the UK," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 405-414, February.
  12. Filardo, Andrew J. & Gordon, Stephen F., 1998. "Business cycle durations," Journal of Econometrics, Elsevier, Elsevier, vol. 85(1), pages 99-123, July.
  13. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, Econometric Society, vol. 59(2), pages 347-70, March.
  14. Ramón Cobo-Reyes & Gabriel Pérez Quirós, 2005. "The effect of oil price on industrial production and on stock returns," ThE Papers 05/18, Department of Economic Theory and Economic History of the University of Granada..
  15. Raymond, Jennie E & Rich, Robert W, 1997. "Oil and the Macroeconomy: A Markov State-Switching Approach," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 29(2), pages 193-213, May.
  16. Maheu, John M & McCurdy, Thomas H, 2000. "Identifying Bull and Bear Markets in Stock Returns," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 18(1), pages 100-112, January.
  17. Filardo, Andrew J, 1994. "Business-Cycle Phases and Their Transitional Dynamics," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 12(3), pages 299-308, July.
  18. Hamilton, James D., 2003. "What is an oil shock?," Journal of Econometrics, Elsevier, Elsevier, vol. 113(2), pages 363-398, April.
  19. Dueker, Michael J, 1997. "Markov Switching in GARCH Processes and Mean-Reverting Stock-Market Volatility," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 15(1), pages 26-34, January.
  20. Faff, Robert W. & Brailsford, Timothy J., 1999. "Oil price risk and the Australian stock market," Journal of Energy Finance & Development, Elsevier, Elsevier, vol. 4(1), pages 69-87, 06.
  21. Turner, Christopher M. & Startz, Richard & Nelson, Charles R., 1989. "A Markov model of heteroskedasticity, risk, and learning in the stock market," Journal of Financial Economics, Elsevier, Elsevier, vol. 25(1), pages 3-22, November.
  22. Hamilton, James D., 1996. "Specification testing in Markov-switching time-series models," Journal of Econometrics, Elsevier, Elsevier, vol. 70(1), pages 127-157, January.
  23. Sadorsky, Perry, 1999. "Oil price shocks and stock market activity," Energy Economics, Elsevier, Elsevier, vol. 21(5), pages 449-469, October.
  24. Kim, C-J & Nelson, C-R, 1997. "Friedman's Plucking Model of Business Fluctuations : Tests and Estimates of Permanent and Transitory Components," Discussion Papers in Economics at the University of Washington, Department of Economics at the University of Washington 97-06, Department of Economics at the University of Washington.
  25. Turner, C.M. & Startz, R. & Nelson, C.R., 1989. "The Markov Model Of Heteroskedasticity, Risk And Learning In The Stock Market," Discussion Papers in Economics at the University of Washington, Department of Economics at the University of Washington 89-01, Department of Economics at the University of Washington.
  26. Hung, Jui-Cheng & Lee, Ming-Chih & Liu, Hung-Chun, 2008. "Estimation of value-at-risk for energy commodities via fat-tailed GARCH models," Energy Economics, Elsevier, Elsevier, vol. 30(3), pages 1173-1191, May.
  27. Hamilton, James D. & Susmel, Raul, 1994. "Autoregressive conditional heteroskedasticity and changes in regime," Journal of Econometrics, Elsevier, Elsevier, vol. 64(1-2), pages 307-333.
  28. Park, Jungwook & Ratti, Ronald A., 2008. "Oil price shocks and stock markets in the U.S. and 13 European countries," Energy Economics, Elsevier, Elsevier, vol. 30(5), pages 2587-2608, September.
  29. Huntley Schaller & Simon Van Norden, 1997. "Regime switching in stock market returns," Applied Financial Economics, Taylor & Francis Journals, vol. 7(2), pages 177-191.
  30. Mork, Knut Anton, 1989. "Oil and Macroeconomy When Prices Go Up and Down: An Extension of Hamilton's Results," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(3), pages 740-44, June.
  31. Hammoudeh, Shawkat & Choi, Kyongwook, 2007. "Characteristics of permanent and transitory returns in oil-sensitive emerging stock markets: The case of GCC countries," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 17(3), pages 231-245, July.
  32. Maghyereh, A., 2004. "Oil Price Shocks and Emerging Stock Markets: A Generalized VAR Approach," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, Euro-American Association of Economic Development, vol. 1(2), pages 27-40.
  33. Mark Holmes & Ping Wang, 2003. "Oil Price Shocks and the Asymmetric Adjustment of UK Output: A Markov-switching approach," International Review of Applied Economics, Taylor & Francis Journals, vol. 17(2), pages 181-192.
  34. Watson, Mark W., 1986. "Univariate detrending methods with stochastic trends," Journal of Monetary Economics, Elsevier, Elsevier, vol. 18(1), pages 49-75, July.
  35. Kiseok Lee & Shawn Ni & Ronald A. Ratti, 1995. "Oil Shocks and the Macroeconomy: The Role of Price Variability," The Energy Journal, International Association for Energy Economics, International Association for Energy Economics, vol. 0(Number 4), pages 39-56.
  36. Papapetrou, Evangelia, 2001. "Oil price shocks, stock market, economic activity and employment in Greece," Energy Economics, Elsevier, Elsevier, vol. 23(5), pages 511-532, September.
  37. Ciner Cetin, 2001. "Energy Shocks and Financial Markets: Nonlinear Linkages," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 5(3), pages 1-11, October.
  38. Allan Timmermann & Massimo Guidolin, 2006. "An econometric model of nonlinear dynamics in the joint distribution of stock and bond returns," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 21(1), pages 1-22.
  39. Bae, Jinho & Kim, Chang-Jin & Nelson, Charles R., 2007. "Why are stock returns and volatility negatively correlated?," Journal of Empirical Finance, Elsevier, Elsevier, vol. 14(1), pages 41-58, January.
  40. Cong, Rong-Gang & Wei, Yi-Ming & Jiao, Jian-Lin & Fan, Ying, 2008. "Relationships between oil price shocks and stock market: An empirical analysis from China," Energy Policy, Elsevier, vol. 36(9), pages 3544-3553, September.
  41. Matteo Manera & Alessandro Cologni, 2006. "The Asymmetric Effects of Oil Shocks on Output Growth: A Markov-Switching Analysis for the G-7 Countries," Working Papers 2006.29, Fondazione Eni Enrico Mattei.
  42. Hamilton, James D, 1983. "Oil and the Macroeconomy since World War II," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(2), pages 228-48, April.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:eee:eneeco:v:31:y:2009:i:5:p:789-799. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.