IDEAS home Printed from https://ideas.repec.org/a/eee/reveco/v27y2013icp416-431.html
   My bibliography  Save this article

Nonlinear analysis among crude oil prices, stock markets' return and macroeconomic variables

Author

Listed:
  • Naifar, Nader
  • Al Dohaiman, Mohammed Saleh

Abstract

This paper has two aims. First, we study the impact of oil price variables (change and volatility) on stock market returns under regime shifts in the case of Gulf Cooperation Council (GCC) countries. We employ a Markov regime-switching model to generate regime probabilities for oil market variables. We use two state Markov switching models: crisis regime and non-crisis regime. Second, we investigate the non-linear relationship among oil price, interest rates and inflation rates before and during the subprime crisis. We consider several Archimedean copula models with different tail dependence structures, namely, Gumbel, Clayton and Frank copulas. We find evidence that the relationship between GCC stock market returns and OPEC oil market volatility is regime dependent (excluding Oman in the low volatility state). We also find that the dependence structure between inflation rates and crude oil prices is asymmetric and orients toward the upper side during the recent financial crisis. Furthermore, we find evidence of significant symmetric dependence between crude oil prices and the short-term interest rate during the financial crisis. These paper's results have practical significance and important implications for both GCC economic policy and financial stability.

Suggested Citation

  • Naifar, Nader & Al Dohaiman, Mohammed Saleh, 2013. "Nonlinear analysis among crude oil prices, stock markets' return and macroeconomic variables," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 416-431.
  • Handle: RePEc:eee:reveco:v:27:y:2013:i:c:p:416-431
    DOI: 10.1016/j.iref.2013.01.001
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1059056013000026
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Hamilton, James D., 1996. "This is what happened to the oil price-macroeconomy relationship," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 215-220, October.
    2. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-370, March.
    3. Mohanty, Sunil K. & Nandha, Mohan & Turkistani, Abdullah Q. & Alaitani, Muhammed Y., 2011. "Oil price movements and stock market returns: Evidence from Gulf Cooperation Council (GCC) countries," Global Finance Journal, Elsevier, vol. 22(1), pages 42-55.
    4. Nguyen, Cuong C. & Bhatti, M. Ishaq, 2012. "Copula model dependency between oil prices and stock markets: Evidence from China and Vietnam," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(4), pages 758-773.
    5. 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.
    6. Arouri Mohamed el hédi & Fouquau Julien, 2009. "On the short-term influence of oil price changes on stock markets in gcc countries: linear and nonlinear analyses," Economics Bulletin, AccessEcon, vol. 29(2), pages 795-804.
    7. Robert B. Barsky & Lutz Kilian, 2004. "Oil and the Macroeconomy Since the 1970s," Journal of Economic Perspectives, American Economic Association, vol. 18(4), pages 115-134, Fall.
    8. Basher, Syed A. & Sadorsky, Perry, 2006. "Oil price risk and emerging stock markets," Global Finance Journal, Elsevier, vol. 17(2), pages 224-251, December.
    9. 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.
    10. Lutz Kilian, 2008. "The Economic Effects of Energy Price Shocks," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 871-909, December.
    11. 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.
    12. Huang, Bwo-Nung & Hwang, M.J. & Peng, Hsiao-Ping, 2005. "The asymmetry of the impact of oil price shocks on economic activities: An application of the multivariate threshold model," Energy Economics, Elsevier, vol. 27(3), pages 455-476, May.
    13. Papapetrou, Evangelia, 2001. "Oil price shocks, stock market, economic activity and employment in Greece," Energy Economics, Elsevier, vol. 23(5), pages 511-532, September.
    14. Ewing, Bradley T. & Thompson, Mark A., 2007. "Dynamic cyclical comovements of oil prices with industrial production, consumer prices, unemployment, and stock prices," Energy Policy, Elsevier, vol. 35(11), pages 5535-5540, November.
    15. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-384, March.
    16. Jones, Charles M & Kaul, Gautam, 1996. " Oil and the Stock Markets," Journal of Finance, American Finance Association, vol. 51(2), pages 463-491, June.
    17. Thompson, Henry & Toledo, Hugo, 2010. "Labor skills and factor proportions trade in the gulf cooperation council," International Review of Economics & Finance, Elsevier, vol. 19(3), pages 407-411, June.
    18. Henriques, Irene & Sadorsky, Perry, 2008. "Oil prices and the stock prices of alternative energy companies," Energy Economics, Elsevier, vol. 30(3), pages 998-1010, May.
    19. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    20. Cunado, Juncal & Perez de Gracia, Fernando, 2003. "Do oil price shocks matter? Evidence for some European countries," Energy Economics, Elsevier, vol. 25(2), pages 137-154, March.
    21. Peter Ferderer, J., 1996. "Oil price volatility and the macroeconomy," Journal of Macroeconomics, Elsevier, vol. 18(1), pages 1-26.
    22. Faff, Robert W. & Brailsford, Timothy J., 1999. "Oil price risk and the Australian stock market," Journal of Energy Finance & Development, Elsevier, vol. 4(1), pages 69-87, June.
    23. Coudert, Virginie & Gex, Mathieu, 2010. "Contagion inside the credit default swaps market: The case of the GM and Ford crisis in 2005," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 20(2), pages 109-134, April.
    24. Guo, Feng & Chen, Carl R. & Huang, Ying Sophie, 2011. "Markets contagion during financial crisis: A regime-switching approach," International Review of Economics & Finance, Elsevier, vol. 20(1), pages 95-109, January.
    25. Malik, Farooq & Hammoudeh, Shawkat, 2007. "Shock and volatility transmission in the oil, US and Gulf equity markets," International Review of Economics & Finance, Elsevier, vol. 16(3), pages 357-368.
    26. 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.
    27. Tahsin Saadi Sedik & Oral Williams, 2011. "Global and Regional Spillovers to GCC Equity Markets," IMF Working Papers 11/138, International Monetary Fund.
    28. Robert B. Barsky & Lutz Kilian, 2002. "Do We Really Know that Oil Caused the Great Stagflation? A Monetary Alternative," NBER Chapters,in: NBER Macroeconomics Annual 2001, Volume 16, pages 137-198 National Bureau of Economic Research, Inc.
    29. Toledo, Hugo, 2011. "EU-GCC free trade agreement: Adjustments in a factors proportion model for the UAE," International Review of Economics & Finance, Elsevier, vol. 20(2), pages 248-256, April.
    30. Yang, C. W. & Hwang, M. J. & Huang, B. N., 2002. "An analysis of factors affecting price volatility of the US oil market," Energy Economics, Elsevier, vol. 24(2), pages 107-119, March.
    31. Burbidge, John & Harrison, Alan, 1984. "Testing for the Effects of Oil-Price Rises Using Vector Autoregressions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(2), pages 459-484, June.
    32. Aloui, Chaker & Jammazi, Rania, 2009. "The effects of crude oil shocks on stock market shifts behaviour: A regime switching approach," Energy Economics, Elsevier, vol. 31(5), pages 789-799, September.
    33. Rebeca Jimenez-Rodriguez & Marcelo Sanchez, 2005. "Oil price shocks and real GDP growth: empirical evidence for some OECD countries," Applied Economics, Taylor & Francis Journals, vol. 37(2), pages 201-228.
    34. Aktham Maghyereh & Ahmad Al-Kandari, 2007. "Oil prices and stock markets in GCC countries: new evidence from nonlinear cointegration analysis," Managerial Finance, Emerald Group Publishing, vol. 33(7), pages 449-460, June.
    35. Herrera, Ana María & Pesavento, Elena, 2009. "Oil Price Shocks, Systematic Monetary Policy, And The “Great Moderation”," Macroeconomic Dynamics, Cambridge University Press, vol. 13(01), pages 107-137, February.
    36. Chang-Jin Kim & Charles R. Nelson, 1999. "State-Space Models with Regime Switching: Classical and Gibbs-Sampling Approaches with Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262112388, January.
    37. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Crude oil price volatility; GCC economy; Nonlinear relationship; Stock market; Regime switching;

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C29 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Other
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:reveco:v:27:y:2013:i:c:p:416-431. 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: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/inca/620165 .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.