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Nonlinear modeling of oil and stock price dynamics: segmentation or time-varying integration?

  • Mohamed E AROURI

    ()

    (EDHEC Business School)

  • Fredj JAWADI

    ()

    (University of Evry & Amiens School of Management)

  • Duc K NGUYEN

    ()

    (ISC Paris School of Management)

In this paper, we show the usefulness of the switching transition error correction model in reproducing the bilateral linkages between oil and stock markets over the last three decades. Our findings show that while linear models fail to apprehend significant relationships between oil and stock markets, the hypothesis of financial and oil markets integration cannot be rejected using nonlinear cointegration models. More interestingly, this cointegration relationship is represented by an on-going process partially activated per regime when oil price deviations move away from their equilibrium with stock prices and exceed some threshold.

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Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 32 (2012)
Issue (Month): 3 ()
Pages: 2481-2489

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Handle: RePEc:ebl:ecbull:eb-12-00201
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  1. Hamilton, James D., 2003. "What is an oil shock?," Journal of Econometrics, Elsevier, vol. 113(2), pages 363-398, April.
  2. Zhang, Dayong, 2008. "Oil shock and economic growth in Japan: A nonlinear approach," Energy Economics, Elsevier, vol. 30(5), pages 2374-2390, September.
  3. Papapetrou, Evangelia, 2001. "Oil price shocks, stock market, economic activity and employment in Greece," Energy Economics, Elsevier, vol. 23(5), pages 511-532, September.
  4. Basher, Syed A. & Sadorsky, Perry, 2006. "Oil price risk and emerging stock markets," Global Finance Journal, Elsevier, vol. 17(2), pages 224-251, December.
  5. Escribano, Alvaro & Pfann, Gerard A., 1998. "Non-linear error correction, asymmetric adjustment and cointegration," Economic Modelling, Elsevier, vol. 15(2), pages 197-216, April.
  6. Franses,Philip Hans & Dijk,Dick van, 2000. "Non-Linear Time Series Models in Empirical Finance," Cambridge Books, Cambridge University Press, number 9780521779654.
  7. Juncal Cunado & Fernando Pérez de Gracia, 2004. "Oil Prices, Economic Activity and Inflation: Evidence for Some Asian Countries," Faculty Working Papers 06/04, School of Economics and Business Administration, University of Navarra.
  8. Lardic, Sandrine & Mignon, Valérie, 2008. "Oil prices and economic activity: An asymmetric cointegration approach," Energy Economics, Elsevier, vol. 30(3), pages 847-855, May.
  9. Georges Prat & Fredj Jawadi, 2007. "Nonlinear stock prices adjustment in the G7 countries," Working Papers halshs-00172896, HAL.
  10. Sadorsky, Perry, 1999. "Oil price shocks and stock market activity," Energy Economics, Elsevier, vol. 21(5), pages 449-469, October.
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