Non-linear cointegration between oil and stock prices: The role of interest rates

Ana R. Martínez-Cañete, Elena Márquez-de-la-Cruz and Inés Pérez-Soba

Research in International Business and Finance, 2022, vol. 59, issue C

Abstract: The Zero Lower Bound (ZLB) has been suggested as an explanation as to why oil and stock prices have become highly correlated post 2008. Our paper contributes to the literature on this topic by testing (i) whether there is a long-run relationship between oil prices and stock prices (measured by the MSCI World Index) that is non-linear depending on the interest rate levels and, if this is the case, (ii) whether the co-movement between them is stronger when interest rates are very low. To do so, we apply a cointegrating smooth transition regression approach using a global shadow rate as the transition variable to take into account the possible effects of unconventional monetary policy measures on the oil-stock price linkage. We find evidence in favor of the two hypotheses tested. These results have important implications for portfolio managers and investors, since the benefits of portfolio diversification by investing in oil would be lower in a ZLB context. In addition, from a policymakers’ perspective, the results could be revealing that, in this context, central banks could exert a greater influence than in “normal times” not only on equity prices, but also on global oil prices.

Keywords: Oil price; Stock prices; Shadow rate; Zero Lower Bound; Non-linear cointegration; Unconventional monetary policy measures (search for similar items in EconPapers)
JEL-codes: C32 E43 G15 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0275531921001343
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:59:y:2022:i:c:s0275531921001343

DOI: 10.1016/j.ribaf.2021.101513

Access Statistics for this article

Research in International Business and Finance is currently edited by T. Lagoarde Segot

More articles in Research in International Business and Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().