A Markov Switching Approach in Assessing Oil Price and Stock Market Nexus in the Last Decade: The Impact of the COVID-19 Pandemic

Seuk Wai Phoong; Masnun Al Mahi; Seuk Yen Phoong

doi:10.1177/21582440231153855

A Markov Switching Approach in Assessing Oil Price and Stock Market Nexus in the Last Decade: The Impact of the COVID-19 Pandemic

Sage Open. 2023 Feb 20;13(1):21582440231153855. doi: 10.1177/21582440231153855. eCollection 2023 Jan-Mar.

Authors

Seuk Wai Phoong¹, Masnun Al Mahi², Seuk Yen Phoong³

Affiliations

¹ Universiti Malaya, Kuala Lumpur, Malaysia.
² BRAC University, Bangladesh.
³ Universiti Pendidikan Sultan Idris, Tanjung Malim, Malaysia.

Abstract

We revisit the oil price and stock market nexus by considering the impact of major economic shocks in the post-global financial crisis (GFC) scenario. Our breakpoint unit root test and Markov switching regression (MRS) analyses using West Texas Intermediate (WTI) oil price and Standard & Poor's 500 (S&P 500) market index show that among the major economic events, the recent coronavirus (COVID-19) pandemic is the most significant contributor to market volatilities. Furthermore, our MRS results show that the relationship between oil price and the stock market is regime-dependent; the stock market experiences substantial and positive shocks in a volatile oil price regime. Our results provide valuable insights to investors and policymakers regarding risk management and financial market stability during economic crisis periods, specifically during the COVID-19 pandemic.

Keywords: COVID-19; Markov switching model; breakpoint unit root test; oil price; stock price.