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Nonlinear mean reversion in oil and stock markets

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  • Fredj Jawadi
  • Mondher Bellalah

Abstract

Purpose - While price studies such as Jawadiet 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 Jawadiet 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.

Suggested Citation

  • Fredj Jawadi & Mondher Bellalah, 2011. "Nonlinear mean reversion in oil and stock markets," Review of Accounting and Finance, Emerald Group Publishing Limited, vol. 10(3), pages 316-326, August.
    • Handle: RePEc:eme:rafpps:v:10:y:2011:i:3:p:316-326
    DOI: 10.1108/14757701111155815
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    References listed on IDEAS

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    1. Taylor, Mark P & Peel, David A & Sarno, Lucio, 2001. "Nonlinear Mean-Reversion in Real Exchange Rates: Toward a Solution to the Purchasing Power Parity Puzzles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 1015-1042, November.
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    Cited by:

    1. Aghababa, Hajar & Barnett, William A., 2016. "Dynamic structure of the spot price of crude oil: does time aggregation matter?," Energy Economics, Elsevier, vol. 59(C), pages 227-237.
    2. Areli Bermudez Delgado, Nancy & Bermudez Delgado, Estefanía & Saucedo, Eduardo, 2018. "The relationship between oil prices, the stock market and the exchange rate: Evidence from Mexico," The North American Journal of Economics and Finance, Elsevier, vol. 45(C), pages 266-275.
    3. Monge, Manuel & Gil-Alana, Luis A. & Pérez de Gracia, Fernando, 2017. "Crude oil price behaviour before and after military conflicts and geopolitical events," Energy, Elsevier, vol. 120(C), pages 79-91.
    4. Kisswani, Khalid M. & Nusair, Salah A., 2013. "Non-linearities in the dynamics of oil prices," Energy Economics, Elsevier, vol. 36(C), pages 341-353.

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