The causal nexus between oil prices and equity market in the U.S.: A regime switching model
The aim of this paper is to analyse the causal link between monthly oil futures price changes and a sub-grouping of S&P 500 stock index changes. The causal linkage between oil and stock markets is modelled using a vector autoregressive model with time-varying parameters so as to reflect changes in Granger causality over time. A Markov switching vector autoregressive (MS-VAR) model, in which causal link between the series is stochastic and governed by an unobservable Markov chain, is used for inferring time-varying causality. Although we do not find any lead–lag type Granger causality, the results based on the MS-VAR model clearly show that oil futures price has strong regime prediction power for a sub-grouping of S&P 500 stock index during various sub-periods in the sample, while there is a weak evidence for the regime prediction power of a sub-grouping of S&P 500 stock indexes. The regime-prediction non-causality tests on the MS-VAR model show that both variables are useful for making inference about the regime process and that the evidence on regime-prediction causality is primarily found in the equation describing a sub-grouping of S&P 500 stock market returns. The evidence from the conditional non-causality tests shows that past information on the other series fails to improve the one step ahead prediction for both oil futures and stock returns.
If 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.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
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.:
- Knut Anton Mork & Oystein Olsen & Hans Terje Mysen, 1994. "Macroeconomic Responses to Oil Price Increases and Decreases in Seven OECD Countries," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 19-36.
- Zhang, Dayong, 2008. "Oil shock and economic growth in Japan: A nonlinear approach," Energy Economics, Elsevier, vol. 30(5), pages 2374-2390, September.
- Hamilton, James D, 2001.
"A Parametric Approach to Flexible Nonlinear Inference,"
Econometric Society, vol. 69(3), pages 537-73, May.
- Hamilton, James D., 1999. "A Parametric Approach to Flexible Nonlinear Inference," University of California at San Diego, Economics Working Paper Series qt68s8157x, Department of Economics, UC San Diego.
- Bopp, Anthony E. & Lady, George M., 1991. "A comparison of petroleum futures versus spot prices as predictors of prices in the future," Energy Economics, Elsevier, vol. 13(4), pages 274-282, October.
- Ciner Cetin, 2001. "Energy Shocks and Financial Markets: Nonlinear Linkages," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 5(3), pages 1-11, October.
- Nathan S. Balke & Stephen P. A. Brown & Mine Yücel, 1999.
"Oil price shocks and the U.S. economy: where does the asymmetry originate?,"
9911, Federal Reserve Bank of Dallas.
- Nathan S. Balke & Stephen P.A. Brown & Mine K. Yucel, 2002. "Oil Price Shocks and the U.S. Economy: Where Does the Asymmetry Originate?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 27-52.
- Jacobson, Tor & Lindh, Thomas & Warne, Anders, 1998.
"Growth, Savings, Financial Markets and Markov Switching Regimes,"
Working Paper Series
69, Sveriges Riksbank (Central Bank of Sweden).
- Jacobson Tor & Lindh Thomas & Warne Anders, 2002. "Growth, Saving, Financial Markets, and Markov Switching Regimes," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 5(4), pages 1-20, January.
- Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
- Marco G.D. Guidi & Alexander Russell & Heather Tarbert, 2006. "The effect of OPEC policy decisions on oil and stock prices," OPEC Energy Review, Organization of the Petroleum Exporting Countries, vol. 30(1), pages 1-18, 03.
- El-Sharif, Idris & Brown, Dick & Burton, Bruce & Nixon, Bill & Russell, Alex, 2005. "Evidence on the nature and extent of the relationship between oil prices and equity values in the UK," Energy Economics, Elsevier, vol. 27(6), pages 819-830, November.
- Hammoudeh, Shawkat & Li, Huimin, 2004. "The impact of the Asian crisis on the behavior of US and international petroleum prices," Energy Economics, Elsevier, vol. 26(1), pages 135-160, January.
- Gisser, Micha & Goodwin, Thomas H, 1986. "Crude Oil and the Macroeconomy: Tests of Some Popular Notions: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(1), pages 95-103, February.
- 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.
- Jones, Charles M & Kaul, Gautam, 1996. " Oil and the Stock Markets," Journal of Finance, American Finance Association, vol. 51(2), pages 463-91, June.
- 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.
- Foster, Andrew J., 1996. "Price discovery in oil markets: a time varying analysis of the 1990-1991 Gulf conflict," Energy Economics, Elsevier, vol. 18(3), pages 231-246, July.
- Boyer, M. Martin & Filion, Didier, 2007.
"Common and fundamental factors in stock returns of Canadian oil and gas companies,"
Elsevier, vol. 29(3), pages 428-453, May.
- M. Martin Boyer & Didier Filion, 2004. "Common and Fundamental Factors in Stock Returns of Canadian Oil and Gas Companies," CIRANO Working Papers 2004s-62, CIRANO.
- Hamilton, James D., 1990. "Analysis of time series subject to changes in regime," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 39-70.
- Zeynel Abidin Ozdemir, 2008. "Efficient market hypothesis: evidence from a small open-economy," Applied Economics, Taylor & Francis Journals, vol. 40(5), pages 633-641.
- Donald W. Jones, Paul N. Leiby and Inja K. Paik, 2004. "Oil Price Shocks and the Macroeconomy: What Has Been Learned Since 1996," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 1-32.
- Sadorsky, Perry, 2001. "Risk factors in stock returns of Canadian oil and gas companies," Energy Economics, Elsevier, vol. 23(1), pages 17-28, January.
- 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.
- Moosa, Imad A. & Al-Loughani, Nabeel E., 1994. "Unbiasedness and time varying risk premia in the crude oil futures market," Energy Economics, Elsevier, vol. 16(2), pages 99-105, April.
- Javier F. Mory, 1993. "Oil Prices and Economic Activity: Is the Relationship Symmetric?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 151-162.
- Warne, Anders, 2000. "Causality and Regime Inference in a Markov Switching VAR," Working Paper Series 118, Sveriges Riksbank (Central Bank of Sweden).
- Sadorsky, Perry, 1999. "Oil price shocks and stock market activity," Energy Economics, Elsevier, vol. 21(5), pages 449-469, October.
- Papapetrou, Evangelia, 2001. "Oil price shocks, stock market, economic activity and employment in Greece," Energy Economics, Elsevier, vol. 23(5), pages 511-532, September.
- Farmer, Richard D., 1993. "Forward markets and changes in macroeconomic performance: The case of oil," Journal of Macroeconomics, Elsevier, vol. 15(3), pages 521-552.
- Nandha, Mohan & Faff, Robert, 2008. "Does oil move equity prices? A global view," Energy Economics, Elsevier, vol. 30(3), pages 986-997, May.
When requesting a correction, please mention this item's handle: RePEc:eee:eneeco:v:39:y:2013:i:c:p:271-282. See general 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 you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.