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Testing for Linear and Nonlinear Causality between Crude Oil Price Changes and Stock Market Returns

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  • Emmanuel Anoruo

    (School of Management Science and Economics, Coppin State University, 2500 West North Avenue Baltimore, MD 21216, USA)

Abstract

This paper examines both the linear and nonlinear causal relationships between crude oil price changes and stock market returns for the United States. In particular, the study applied a battery of unit root tests to ascertain the time series properties of crude oil price changes and stock market returns. The linear and nonlinear causality tests were conducted through the standard VAR and the M-G frameworks, respectively. The results from both the linear and nonlinear unit root tests indicate that crude oil price changes and stock market returns are level stationary. The results from the standard VAR model provide evidence of bidirectional causality between crude oil price changes and stock market returns. The results from the M-G causality test support the finding of nonlinear bidirectional causality between crude oil price changes and stock market returns.

Suggested Citation

  • Emmanuel Anoruo, 2011. "Testing for Linear and Nonlinear Causality between Crude Oil Price Changes and Stock Market Returns," International Journal of Business and Economic Sciences Applied Research (IJBESAR), International Hellenic University (IHU), Kavala Campus, Greece (formerly Eastern Macedonia and Thrace Institute of Technology - EMaTTech), vol. 4(3), pages 75-92, December.
    • Handle: RePEc:tei:journl:v:4:y:2011:i:3:p:75-92
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    More about this item

    Keywords

    Crude oil prices; nonlinear causality; stock market returns; BDS; structural breaks;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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