Abstract
This article investigates the long-run and short-run dynamics between US stock prices and oil prices over the period from 1 January 1992 to 22 November 2013 using the S&P 500 index and West Texas Intermediate spot oil prices. Unlike the majority of previous studies that are based on the conventional time series analysis, we examine for the presence of different sources of nonlinearities, such as structural breaks and asymmetric adjustments in the dynamic links between the investigated markets. The results from the threshold autoregressive (TAR) and momentum threshold autoregressive (MTAR) models of Enders and Siklos (2001) in conjunction with the Threshold Error Correction Model estimations provide evidence of asymmetric responses towards the equilibrium.
Notes
1 Among the most possible explanations in the literature about the asymmetric relationship between oil prices and economic activity are the monetary policy proposed by Bernanke et al. (Citation1997), the adverse relationship between investment and uncertainty (Bernanke, Citation1983; Lee et al. Citation1995; Ferderer, Citation1996), the adjustment costs that arise from sectoral imbalances (Hamilton, Citation1988), or from coordination problems between the firms (Huntington, Citation2000), or because the energy-to-output ratio is embedded in the capital stock (Atkeson and Kehoe, Citation1999) and the asymmetry in petroleum product prices (Bacon, Citation1991; Balke et al., Citation1998; Huntington, Citation2000).
2 For more details see Kilian and Park (Citation2007) and Apergis and Miller (Citation2009); they refer to these shocks as precautionary demand shocks.
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