Wavelet decomposition and regime shifts: Assessing the effects of crude oil shocks on stock market returns
AbstractWhile there is a large body of empirical studies on the relationship between crude oil price changes and stock market returns, they have failed to achieve a consensus on this subject. In this paper, we combine wavelet analysis and Markov Switching Vector Autoregressive (MS-VAR) approach to explore the impact of the crude oil (CO) shocks on the stock market returns for UK, France and Japan over the period from January 1989 to December 2007. Our procedure involves the estimation of the extended MS-VAR model in order to investigate the importance of the resultant wavelet filtering series (after removing random components) in determining the behavior of the stock market volatilities. We show that CO shocks do not affect the recession stock market phases (except for Japan). However, they significantly reduce moderate and/or expansion stock market phases temporarily. Moreover, this negative relationship appears to be more pronounced during the pre-1999 period. The empirical findings will prove extremely useful to investors who need to understand the exact effect of international oil changes on certain stocks prices as well as for policy managers who need a more thorough evaluation about the efficiency of hedging policies affected by oil price changes.
Download InfoIf 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.
Bibliographic InfoArticle provided by Elsevier in its journal Energy Policy.
Volume (Year): 38 (2010)
Issue (Month): 3 (March)
Contact details of provider:
Web page: http://www.elsevier.com/locate/enpol
Oil shocks A Trous Haar Wavelet transform Regime switches;
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.:
- Garcia, R. & Perron, P., 1994.
"An Analysis of the Real Interest rate Under Regime Shifts,"
Cahiers de recherche
9428, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
- Garcia, Rene & Perron, Pierre, 1996. "An Analysis of the Real Interest Rate under Regime Shifts," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 111-25, February.
- René Garcia & Pierre Perron, 1995. "An Analysis of the Real Interest Rate Under Regime Shifts," CIRANO Working Papers 95s-05, CIRANO.
- Garcia, R. & Perron, P., 1994. "An Analysis of the Real Interest rate Under Regime Shifts," Cahiers de recherche 9428, Universite de Montreal, Departement de sciences economiques.
- Garcia, R. & Perron, P., 1990. "An Anlysis Of The Real Interest Rate Under Regime Shifts," Papers 353, Princeton, Department of Economics - Econometric Research Program.
- Kandil, Magda & Mirzaie, Ida Aghdas, 2003. "The effects of dollar appreciation on sectoral labor market adjustments: Theory and evidence," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(1), pages 89-117.
- Ben S. Bernanke & Mark Gertler & Mark Watson, 1997. "Systematic Monetary Policy and the Effects of Oil Price Shocks," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1), pages 91-157.
- Aloui, Chaker & Jammazi, Rania, 2009. "The effects of crude oil shocks on stock market shifts behaviour: A regime switching approach," Energy Economics, Elsevier, vol. 31(5), pages 789-799, September.
- John A. Tatom, 1993. "Are There Useful Lessons from the 1990-91Oil Price Shock?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 129-150.
- Michael P. Clements & Hans-Martin Krolzig, 1998. "A comparison of the forecast performance of Markov-switching and threshold autoregressive models of US GNP," Econometrics Journal, Royal Economic Society, vol. 1(Conferenc), pages C47-C75.
- Apergis, Nicholas & Miller, Stephen M., 2009.
"Do structural oil-market shocks affect stock prices?,"
Elsevier, vol. 31(4), pages 569-575, July.
- Nicholas Apergis & Stephen M. Miller, 2008. "Do Structural Oil-Market Shocks Affect Stock Prices?," Working papers 2008-51, University of Connecticut, Department of Economics.
- Nicholas Apergis & Stephen M. Miller, 2009. "Do Structural Oil-Market Shocks Affect Stock Prices?," Working Papers 0917, University of Nevada, Las Vegas , Department of Economics.
- Carruth,a. & Hooker, N. & Oswald,A., 1997.
"Unemployment Equilibria and Input Prices: Theory and Evidence from the United States,"
22, Centre for Economic Performance & Institute of Economics.
- Alan A. Carruth & Mark A. Hooker & Andrew J. Oswald, 1998. "Unemployment Equilibria And Input Prices: Theory And Evidence From The United States," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 621-628, November.
- Carruth, A.A. & Hooker, M.A. & Oswald, A.J., 1998. "Unemployment Equilibria and Input Prices: Theory and Evidence from the United States," The Warwick Economics Research Paper Series (TWERPS) 496, University of Warwick, Department of Economics.
- Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
- Diebold, Francis X & Rudebusch, Glenn D, 1996.
"Measuring Business Cycles: A Modern Perspective,"
The Review of Economics and Statistics,
MIT Press, vol. 78(1), pages 67-77, February.
- Qiao, Zhuo & Smyth, Russell & Wong, Wing-Keung, 2008. "Volatility switching and regime interdependence between information technology stocks 1995-2005," Global Finance Journal, Elsevier, vol. 19(2), pages 139-156.
- Keane, Michael P & Prasad, Eswar S, 1996. "The Employment and Wage Effects of Oil Price Changes: A Sectoral Analysis," The Review of Economics and Statistics, MIT Press, vol. 78(3), pages 389-400, August.
- Park, Jungwook & Ratti, Ronald A., 2008. "Oil price shocks and stock markets in the U.S. and 13 European countries," Energy Economics, Elsevier, vol. 30(5), pages 2587-2608, September.
- Hans-Martin Krolzig, 2001. "Markov-Switching Procedures for Dating the Euro-Zone Business Cycle," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 70(3), pages 339-351.
- Bernanke, Ben S & Gertler, Mark & Watson, Mark W, 2004. "Oil Shocks and Aggregate Macroeconomic Behavior: The Role of Monetary Policy: Reply," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(2), pages 287-91, April.
- James D. Hamilton, 1985. "Historical Causes of Postwar Oil Shocks and Recessions," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 97-116.
- Hamilton, James D. & Susmel, Raul, 1994.
"Autoregressive conditional heteroskedasticity and changes in regime,"
Journal of Econometrics,
Elsevier, vol. 64(1-2), pages 307-333.
- Tom Doan, . "RATS programs to estimate Hamilton-Susmel Markov Switching ARCH model," Statistical Software Components RTZ00083, Boston College Department of Economics.
- Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
- Ciner Cetin, 2001. "Energy Shocks and Financial Markets: Nonlinear Linkages," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 5(3), pages 1-11, October.
- Sadorsky, Perry, 1999. "Oil price shocks and stock market activity," Energy Economics, Elsevier, vol. 21(5), pages 449-469, October.
- Nason, G.P. & von Sachs, R., 1999. "Wavelets in Time Series Analysis," Papers 9901, Catholique de Louvain - Institut de statistique.
- Lamoureux, Christopher G & Lastrapes, William D, 1990. "Persistence in Variance, Structural Change, and the GARCH Model," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(2), pages 225-34, April.
- J. Isaac Miller & Ronald Ratti, 2008.
"Crude Oil and Stock Markets: Stability, Instability, and Bubbles,"
0810, Department of Economics, University of Missouri, revised 20 Jan 2009.
- Miller, J. Isaac & Ratti, Ronald A., 2009. "Crude oil and stock markets: Stability, instability, and bubbles," Energy Economics, Elsevier, vol. 31(4), pages 559-568, July.
- 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, vol. 97(3), pages 740-44, June.
- Cologni, Alessandro & Manera, Matteo, 2008.
"Oil prices, inflation and interest rates in a structural cointegrated VAR model for the G-7 countries,"
Elsevier, vol. 30(3), pages 856-888, May.
- Matteo Manera & Alessandro Cologni, 2005. "Oil Prices, Inflation and Interest Rates in a Structural Cointegrated VAR Model for the G-7 Countries," Working Papers 2005.101, Fondazione Eni Enrico Mattei.
- Hillard G. Huntington, 1998. "Crude Oil Prices and U.S. Economic Performance: Where Does the Asymmetry Reside?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 107-132.
- Chao Wei, 2003. "Energy, the Stock Market, and the Putty-Clay Investment Model," American Economic Review, American Economic Association, vol. 93(1), pages 311-323, March.
- Hamilton, James D, 1988. "A Neoclassical Model of Unemployment and the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 96(3), pages 593-617, June.
- 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, vol. 0(Number 4), pages 39-56.
- Chen, Nai-Fu & Roll, Richard & Ross, Stephen A, 1986. "Economic Forces and the Stock Market," The Journal of Business, University of Chicago Press, vol. 59(3), pages 383-403, July.
- Lutz Kilian & Cheolbeom Park, 2009.
"The Impact Of Oil Price Shocks On The U.S. Stock Market,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(4), pages 1267-1287, November.
- Kilian, Lutz & Park, Cheolbeom, 2007. "The Impact of Oil Price Shocks on the U.S. Stock Market," CEPR Discussion Papers 6166, C.E.P.R. Discussion Papers.
- Chang-Jin Kim & Charles R. Nelson, 1998. "Business Cycle Turning Points, A New Coincident Index, And Tests Of Duration Dependence Based On A Dynamic Factor Model With Regime Switching," The Review of Economics and Statistics, MIT Press, vol. 80(2), pages 188-201, May.
- Lee, Byung Rhae & Lee, Kiseok & Ratti, Ronald A., 2001. "Monetary policy, oil price shocks, and the Japanese economy," Japan and the World Economy, Elsevier, vol. 13(3), pages 321-349, August.
- John A. Tatom, 1988. "Macroeconomic Effects Of The 1986 Oil Price Decline," Contemporary Economic Policy, Western Economic Association International, vol. 6(3), pages 69-82, 07.
- Jones, Charles M & Kaul, Gautam, 1996. " Oil and the Stock Markets," Journal of Finance, American Finance Association, vol. 51(2), pages 463-91, June.
- Hamilton, James D, 1983. "Oil and the Macroeconomy since World War II," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 228-48, April.
- Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral 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 references are entirely missing, you can add them using this form.