Get 20M+ Full-Text Papers For Less Than $1.50/day. Start a 14-Day Trial for You and Your Team.

Learn More →

Nonlinear mean reversion in oil and stock markets

Nonlinear mean reversion in oil and stock markets Purpose – While price studies such as Jawadi et al. generally focus on the relationships between oil and stock markets through the study of oil price on stock markets, this paper takes a different perspective to the linkages between oil and stock markets. This study sets out to investigate the efficiency hypothesis for oil markets while testing for whether oil price dynamics depend on stock market fluctuations or not. Design/methodology/approach – Using nonlinear econometric modeling, this paper investigates the oil market adjustment dynamics for four developed and emerging countries: France, the USA, Mexico and the Philippines. Our findings show strong evidence of significant linkages between oil and stock markets for all the countries under consideration. Findings – As in Jawadi et al. who focus on stock price dynamics regarding oil price, the findings of this present paper, which focuses more on the oil industry, also point to an asymmetrical mean‐reversion between oil and stock markets that occurs in a nonlinear manner. They reject the informational efficiency hypothesis for oil markets. Indeed, while the previous literature often highlights the stock markets' dependence on the oil industry, this study contributes to the literature by concluding in favor of significant feedback from stock to oil markets, which is not compatible with the efficiency principle according to Fama. Research limitations/implications – This paper develops a new nonlinear framework that should improve the investigation of oil‐stock market linkages. Future research could check the forecasting properties of this model to forecast the future dynamics of oil prices. Originality/value – This paper adds to the literature by suggesting that it is not only oil shocks that affect stock markets, but that the latter also have a strong nonlinear impact on oil markets, reducing the diversification benefits of oil‐stock portfolios. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting and Finance Emerald Publishing

Nonlinear mean reversion in oil and stock markets

Review of Accounting and Finance , Volume 10 (3): 11 – Aug 9, 2011

Loading next page...
 
/lp/emerald-publishing/nonlinear-mean-reversion-in-oil-and-stock-markets-WcdVS2K6l2
Publisher
Emerald Publishing
Copyright
Copyright © 2011 Emerald Group Publishing Limited. All rights reserved.
ISSN
1475-7702
DOI
10.1108/14757701111155815
Publisher site
See Article on Publisher Site

Abstract

Purpose – While price studies such as Jawadi et al. generally focus on the relationships between oil and stock markets through the study of oil price on stock markets, this paper takes a different perspective to the linkages between oil and stock markets. This study sets out to investigate the efficiency hypothesis for oil markets while testing for whether oil price dynamics depend on stock market fluctuations or not. Design/methodology/approach – Using nonlinear econometric modeling, this paper investigates the oil market adjustment dynamics for four developed and emerging countries: France, the USA, Mexico and the Philippines. Our findings show strong evidence of significant linkages between oil and stock markets for all the countries under consideration. Findings – As in Jawadi et al. who focus on stock price dynamics regarding oil price, the findings of this present paper, which focuses more on the oil industry, also point to an asymmetrical mean‐reversion between oil and stock markets that occurs in a nonlinear manner. They reject the informational efficiency hypothesis for oil markets. Indeed, while the previous literature often highlights the stock markets' dependence on the oil industry, this study contributes to the literature by concluding in favor of significant feedback from stock to oil markets, which is not compatible with the efficiency principle according to Fama. Research limitations/implications – This paper develops a new nonlinear framework that should improve the investigation of oil‐stock market linkages. Future research could check the forecasting properties of this model to forecast the future dynamics of oil prices. Originality/value – This paper adds to the literature by suggesting that it is not only oil shocks that affect stock markets, but that the latter also have a strong nonlinear impact on oil markets, reducing the diversification benefits of oil‐stock portfolios.

Journal

Review of Accounting and FinanceEmerald Publishing

Published: Aug 9, 2011

Keywords: Oil price adjustment; Stock markets; Nonlinear cointegration; Oil industry; France; United States of America; Mexico; The Philippines

References