A Markov switching approach in assessing oil price and stock market nexus in the last decade: The impact of the COVID-19 pandemic

• Main Authors: Phoong, Seuk Wai, Mahi, Masnun Al, Phoong, Seuk Yen
• Format: Article
• Published: 2023
• Subjects: H Social Sciences (General); HB Economic Theory
• Online Access: http://eprints.um.edu.my/39086/
• Institution: Universiti Malaya

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.