Detection of Structural Regimes and Analyzing the Impact of Crude Oil Market on Canadian Stock Market: Markov Regime-Switching Approach

Mohammadreza Mahmoudi and Hana Ghaneei

Papers from arXiv.org

Abstract: This study aims to analyze the impact of the crude oil market on the Toronto Stock Exchange Index (TSX)c based on monthly data from 1970 to 2021 using Markov-switching vector autoregressive (MSI-VAR) model. The results indicate that TSX return contains two regimes, including: positive return (regime 1), when growth rate of stock index is positive; and negative return (regime 2), when growth rate of stock index is negative. Moreover, regime 1 is more volatile than regime 2. The findings also show the crude oil market has negative effect on the stock market in regime 1, while it has positive effect on the stock market in regime 2. In addition, we can see this effect in regime 1 more significantly in comparison to regime 2. Furthermore, two period lag of oil price decreases stock return in regime 1, while it increases stock return in regime 2.

Date: 2021-08, Revised 2021-10
New Economics Papers: this item is included in nep-ene and nep-isf
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