A Nonlinear Autoregressive Distributed Lag (NARDL) Analysis of West Texas Intermediate Oil Prices and the DOW JONES Index

Abstract

The paper features an examination of the link between the behaviour of oil prices and DowJones Index in a nonlinear autoregressive distributed lag NARDL framework. The attraction of NARDL is that it represents the simplest method available of modelling combined short- and long-run asymmetries. The bounds testing framework adopted means that it can be applied to stationary and non-stationary time series vectors, or combinations of both. The data comprise a monthly West Texas Intermediate (WTI) crude oil series from FRED, commencing in January 2000 and terminating in February 2019, and a corresponding monthly DOW JONES index adjusted-price series obtained from Yahoo Finance. Both series are adjusted for monthly USA CPI values to create real series. The results of the analysis suggest that movements in the lagged real levels of monthly WTI crude oil prices have very significant effects on the behaviour of the DOW JONES Index. They also suggest that negative movements have larger impacts than positive movements in WTI prices, and that long-term multiplier effects take about 9 to 12 months to take effect.

Keywords: NARDL, Bounds Tests, WTI, DOW JONES, asymmetries, multiplier effects

JEL Classification: C22, G12