Regime Switching Model of US Crude Oil and Stock Market Prices: 1859 to 2013

35 Pages Posted: 28 Sep 2014 Last revised: 31 Aug 2016

See all articles by Mehmet Balcilar

Mehmet Balcilar

Eastern Mediterranean University

Rangan Gupta

University of Pretoria - Department of Economics

Stephen M. Miller

University of Nevada, Las Vegas - Department of Economics; University of Connecticut - Department of Economics

Date Written: June 17, 2014

Abstract

This paper examines the relationship between US crude oil and stock market prices, using a Markov-Switching vector error-correction model and a monthly data set from 1859 to 2013. The sample covers the entire modern era of the petroleum industry, which typically begins with the first drilled oil well in Titusville, Pennsylvania in 1858. We estimate a two regime model that divides the sample into high- and low-volatility regimes based on the variance-covariance matrix of the oil and stock prices. We find that the high-volatility regime more frequently exists prior to the Great Depression and after the 1973 oil price shock caused by the Organization of Petroleum Exporting Countries. The low-volatility regime occurs more frequently when the oil markets fell largely under the control of the major international oil companies from the end of the Great Depression to the first oil price shock in 1973. Using the National Bureau of Economic research business cycle dates, we also find that the high-volatility regime more likely occurs when the economy experiences a recession.

Keywords: Markov switching, vector error correction, oil and stock prices

JEL Classification: C32, E37

Suggested Citation

Balcilar, Mehmet and Gupta, Rangan and Miller, Stephen M., Regime Switching Model of US Crude Oil and Stock Market Prices: 1859 to 2013 (June 17, 2014). Energy Economics, May 2015. Available at SSRN: https://ssrn.com/abstract=2502152 or http://dx.doi.org/10.2139/ssrn.2502152

Mehmet Balcilar

Eastern Mediterranean University ( email )

Gazimagusa
Turkey

HOME PAGE: http://www.mbalcilar.net

Rangan Gupta

University of Pretoria - Department of Economics ( email )

Lynnwood Road
Hillcrest
Pretoria, 0002
South Africa

Stephen M. Miller (Contact Author)

University of Nevada, Las Vegas - Department of Economics ( email )

4505 S. Maryland Parkway
Box 456005
Las Vegas, NV 89154
United States
702-895-3776 (Phone)
702-895-1354 (Fax)

HOME PAGE: http://faculty.unlv.edu/smiller/

University of Connecticut - Department of Economics

365 Fairfield Way, U-1063
Storrs, CT 06269-1063
United States

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