The Relationship between World Stock Markets and Oil Prices: A Nonlinear Analysis

Özet

Purpose – The research investigates the correlation between international stock markets and crude oil prices. Various classifications of indexes, such as those for established, emerging, and frontier markets, have been used for this objective. The objective of the research is to determine the correlation between several regional indicators and oil prices. Design/Methodology/Approach – The study covers weekly data for the period from January 7, 2018, to October 8, 2023. In the study, non-linear unit root tests, specifically the BDS test, as well as the tests proposed by Sollis (2009) and Hu and Chen (2016), have been employed. The study examines the non-linear causation framework by employing the methodology introduced by Diks and Panchenko (2006) to analyze the association between WTI oil prices and Morgan Stanley Capital Index (MSCI) indices. Findings - The study reveals the presence of uni-directional non-linear causality between WTI oil prices and developed and frontier market indices. Additionally, bi-directional non-linear causality is detected between WTI oil prices and the emerging market index. The study revealed the presence of a bidirectional non-linear causality relationship between Brent oil prices and developed and emerging MSCI stock market indices. However, a unidirectional non-linear causality is seen between the frontier stock market index and Brent oil price. Discussion - The findings may help investors, academics, and regulators. The study's indices of stock markets with various levels of global development may help investors in different countries. First, investors should consider the nonlinear relationship between oil prices and stock markets when developing portfolio management and risk hedging methods. They should start models and plans with nonlinearity. Investors may reduce risk by monitoring the stock-oil price relationship. Oil price changes should concern policymakers. They must account for nonlinear connections if oil prices rise or fall.