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Regime dependence in the oil-stock market relationship: The role of oil price uncertainty

Author

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  • Heinlein, Reinhold
  • Mahadeo, Scott M.R.

Abstract

We compare the interaction between the crude oil and US stock markets in regimes where oil price uncertainty is high versus low, using a smooth transition vector autoregressive model. Our results show that supply- and demand-side shocks from the oil market, as well as stock market shocks, tend to have greater effect sizes in the lower oil price uncertainty regime. These asymmetric findings are consistent with the premise that shocks occurring in a relatively calmer environment are inclined to surprise market participants more, thereby eliciting amplified responses, than during an environment where oil price uncertainty is anticipated to be higher.

Suggested Citation

  • Heinlein, Reinhold & Mahadeo, Scott M.R., 2025. "Regime dependence in the oil-stock market relationship: The role of oil price uncertainty," Economics Letters, Elsevier, vol. 251(C).
    • Handle: RePEc:eee:ecolet:v:251:y:2025:i:c:s0165176525001284
    DOI: 10.1016/j.econlet.2025.112291
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    More about this item

    Keywords

    Oil price uncertainty; Oil shocks; Structural smooth transition VAR; Stock returns;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • 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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