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Nonlinear effects of oil shocks on stock returns: a Markov-switching approach

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Abstract:

Using Markov-switching models, we investigate whether oil price shocks have nonlinear effects on stock returns. Empirical evidence from a set of international stock indexes suggests that an increase in oil prices has a negative and significant impact on stock prices in one state of the economy, whereas this effect is significantly dampened in another state of the economy. Furthermore, it is shown that changes in oil prices or in oil price volatility do not lead to a higher probability of switching between regimes.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036840802314606

Affiliations: Department of Economics, Universidade de Santiago de Compostela, Spain

Publication date: December 1, 2010

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