Scandinavian Working Papers in Economics

Discussion Papers on Economics,
University of Southern Denmark, Department of Economics

No 3/2009: Threshold cointegration relationships between oil and stock markets

Fredj Jawadi and Patrick Leoni
Additional contact information
Fredj Jawadi: Amiens School of Management, Postal: 18 place Saint Michel, 80000 Amiens, France
Patrick Leoni: Department of Business and Economics, Postal: University of Southern Denmark, Campusvej 55, DK-5230 Odense M, Denmark

Abstract: The aim of this paper is to study the oil price adjustment dynamics and to implicitly test the efficiency hypothesis for the oil market. Thus, we propose to study the oil price evolution in a nonlinear framework while testing the interdependence hypothesis between oil and stock markets. Four countries, the USA, France, Mexico and the Philippines are concerned by our findings which show several important results. Firstly, we show some evidence of linear linkage between stock markets and oil industry and we prove the existence of significant long-run relationships between oil and stock markets, indicating that the oil market is not efficient. Secondly, using nonlinear cointegration techniques, we propose a new nonlinear modeling to reproduce the oil price adjustment dynamics. It takes into account both stock and oil market variations. More importantly, the oil price is nonlinear, mean-reverting toward the equilibrium and with an adjustment speed that increases according to oil price deviations toward the stock market equilibrium.

Keywords: Oil price adjustment; stock markets; nonlinear cointegration

JEL-codes: C22; E32; G15

11 pages, January 3, 2009

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