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Threshold cointegration relationships between oil and stock markets

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Author Info

  • Jawadi, Fredj

    (Amiens School of Management)

  • Leoni, Patrick

    (Department of Business and Economics)

Abstract

The aim of this paper is to study the oil price adjustment dynamics and to implicitly test the efficiency hypothesis for the oil market. Thus, we propose to study the oil price evolution in a nonlinear framework while testing the interdependence hypothesis between oil and stock markets. Four countries, the USA, France, Mexico and the Philippines are concerned by our findings which show several important results. Firstly, we show some evidence of linear linkage between stock markets and oil industry and we prove the existence of significant long-run relationships between oil and stock markets, indicating that the oil market is not efficient. Secondly, using nonlinear cointegration techniques, we propose a new nonlinear modeling to reproduce the oil price adjustment dynamics. It takes into account both stock and oil market variations. More importantly, the oil price is nonlinear, mean-reverting toward the equilibrium and with an adjustment speed that increases according to oil price deviations toward the stock market equilibrium.

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File URL: http://static.sdu.dk/mediafiles//Files/Om_SDU/Institutter/Ivoe/Disc_papers/Disc_2009/dpbe3_2009.pdf
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Bibliographic Info

Paper provided by Department of Business and Economics, University of Southern Denmark in its series Discussion Papers of Business and Economics with number 3/2009.

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Length: 11 pages
Date of creation: 03 Jan 2009
Date of revision:
Handle: RePEc:hhs:sdueko:2009_003

Contact details of provider:
Postal: Department of Business and Economics, University of Southern Denmark, Campusvej 55, DK-5230 Odense M, Denmark
Phone: 65 50 32 33
Fax: 65 50 32 37
Email:
Web page: http://www.sdu.dk/ivoe
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Related research

Keywords: Oil price adjustment; stock markets; nonlinear cointegration;

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References

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  1. Georges Prat & Fredj Jawadi, 2007. "Nonlinear stock prices adjustment in the G7 countries," Working Papers halshs-00172896, HAL.
  2. Michael, Panos & Nobay, A Robert & Peel, David A, 1997. "Transactions Costs and Nonlinear Adjustment in Real Exchange Rates: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 862-79, August.
  3. Tsangyao Chang, 2001. "Are there any long-run benefits from international equity diversification for Taiwan investors diversifying in the equity markets of its major trading partners, Hong Kong, Japan, South Korea, Thailand," Applied Economics Letters, Taylor & Francis Journals, vol. 8(7), pages 441-446.
  4. Lardic, Sandrine & Mignon, Valerie, 2006. "The impact of oil prices on GDP in European countries: An empirical investigation based on asymmetric cointegration," Energy Policy, Elsevier, vol. 34(18), pages 3910-3915, December.
  5. Peel, David & Sarno, Lucio & Taylor, Mark P, 2001. "Nonlinear Mean-Reversion in Real Exchange Rates: Towards a Solution to the Purchasing Power Parity Puzzles," CEPR Discussion Papers 2658, C.E.P.R. Discussion Papers.
  6. Anderson, Heather M, 1997. "Transaction Costs and Non-linear Adjustment towards Equilibrium in the US Treasury Bill Market," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 59(4), pages 465-84, November.
  7. Lardic, Sandrine & Mignon, Valérie, 2008. "Oil prices and economic activity: An asymmetric cointegration approach," Energy Economics, Elsevier, vol. 30(3), pages 847-855, May.
  8. Jeon, Bang Nam & Chiang, Thomas C., 1991. "A system of stock prices in world stock exchanges: Common stochastic trends for 1975-1990," Journal of Economics and Business, Elsevier, vol. 43(4), pages 329-338, November.
  9. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
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Citations

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Cited by:
  1. Burcu Kiran, 2011. "Fractional Cointegration Relationship between Oil Prices and Stock Markets: An Empirical Analysis from G7 Countries," Prague Economic Papers, University of Economics, Prague, vol. 2011(2), pages 177-189.

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