Oil and stock prices: New evidence from a time varying homogenous panel smooth transition VECM for seven developing countries

Abstract

This paper investigates the relationship between international oil price and stock prices applying the time varying causality testing over the period of 2000M1-2017M3. The panel unit root and panel cointegration tests considering cross-section dependence are also employed. A time varying panel smooth transition vector error correction (TV-PSTRVEC) model is a developed and estimated for testing the presence of non-linear short-run and long-run causality, and cointegrating relationship between stock and oil prices. The empirical findings indicate that short and long-run causalities between oil price and stock prices are time-dependent. Moreover, oil price cause stock prices in the long-run. In the short-run, neutral effect exists between oil price and stock prices. These two findings are evidence of a strong exogeneity of oil price in time-dependent regimes which is also supporting the recent arguments and empirical findings. © 2020 John Wiley & Sons Ltd