Non-Linear Relationships Among Oil Price, Gold Price and Stock Market Returns in Iran: A Multivariate Regime-Switching Approach


Department of Economic, Kharazmi University, Tehran


In this paper, the effects of oil and gold prices on stock market index are investigated. We use a cointegrated vector autoregressive Markov-switching model to examine the nonlinear properties of these three variables during the period of January 2003 - December 2014. The Markov-switching vector-equilibrium-correction model with three regimes representing "deep recession", "mild recession" and "expansion" provides a good characterization of the sample data. The results of the model show that the impact of oil price on stock returns is positive and significant in the short run. However, it has negative effects on stock market in the long run. Moreover, we find out that the relationship between gold price and stock market returns varies during the period under investigation depending on the market conditions. More specifically, the positive gold price shock decreases the stock market returns in the short run (10 months), while it increases the stock market returns in the medium and long run.


Arouri, M. E. H., & Fouquau, J. (2009). On the short-term influence of oil price changes on stock markets in GCC countries: linear and nonlinear analyses, Cornell University Library.

Arouri, M. E. H., & Nguyen, D. K. (2010). Oil prices, stock markets and portfolio investment: Evidence from sector analysis in Europe over the last decade. Energy Policy,  38(8), 4528–4539.

Barvch, L. (1988). Toward a Theory of Equitable and Efficient Accounting policy. The Accounting Review, 63, 15-37.

Blot, C., & Labondance, F. (2011). Bank interest rate pass-through in the euro zone: monetary policy transmission during the boom and since the financial crash. Paper presented at the 15th Annual Conference on Macroeconomic Analysis and International Finance.

Clarida, R. H., Sarno, L., Taylor, M. P., & Valente, G. (2006). The role of asymmetries and regime shifts in the term structure of interest rates. Journal of Business, 79(3), 1193-1224.

Dahlquist, M., & Gray, S. F. (2000). Regimes switching and interest rates in the European monetary system. Journal of International Economics, 50, 399-419.

Dimson, E., & Mussavian, M. (1998). A brief history of market efficiency. European Financial Management, 4, 91-193.

Engle, R F., & Granger, C.W. J. (1987). Cointegration and error correction: representation, estimation and testing. Econometrica, 55, 251-276.

Fayyad, A., & Daly, K. (2011). The impact of oil price shocks on stock market returns: comparing GCC countries with the UK and USA. Emerging Markets Review, 12(1), 61-78.

Goldfeld, S. M., & Quandt, R. E. (1973). A Markov model for switching regressions. Journal of Econometrics, 1(1), 3-15.

Hamilton J. D. (1989). A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle. Econometrica, 57, 357-384.

Hamilton, J. D. (1994). Time series analysis (Vol. 2). Princeton: Princeton university press.

Krolzig, H. M. (1996). Statistical analysis of cointegrated VAR processes with Markovian regime shifts. Berlin: Humboldt University Press.

Krolzig, H. M., & Toro, J. (1999). A new approach to the analysis of shocks and the cycle in a model of output and employment. European University Institute. Working paper ECO, no. 99-30.

Maghyereh, A. (2004). Oil price shocks and emerging stock market: a generalized VAR approach. International Journal of Applied Econometrics and Quantitative Studies, 1(2), 27-40.

Maghyereh, A., & Al-Kandari, A. (2007). Oil prices and stock markets in GCC countries: new evidence from nonlinear cointegration analysis. Managerial Finance,  33(7), 449-460.

Mansoor Baig, M., Shahbaz, M., Imran, M., Jabbar, M., & Ain, Q.U.(2013). Long run relationship between gold prices, oil prices and Karachi stock market. Acta Universitatis Danubius, 9(5), 28-39.

Mohd Hussin, M. Y., Muhammad, F., Abu, M. F.,  &Awang, S. A. (2012). Macroeconomic Variables and Malaysia Islamic Stock Market: A Time Series Analysis. Journal of Business Studies Quarterly, 3(4), 1-13.

Mohd Hussin, M. Y., Muhammad, F., Abu-Hussin, M. F., & Abdul Razak, A. (2012). The Relationship between Oil Price, Exchange Rate and Islamic Stock Market in Malaysia. Research Journal of Finance and Accounting, 3(5), 83-92.

Nguyen, C.C., & Bhatti, M.I. (2012). Copula model dependency between oil prices and stock markets: Evidence from China and Vietnam. Journal of International Financial Markets, Institutions & Money, 22, 758–773.

Panagopoulos, Y., &  Spiliotis, A. (2012). Is the Eurozone homogeneous and symmetric? An interest rate pass-through approach before and during the recent financial crisis. Paper presented at the 15th Annual Conference on Macroeconomic Analysis and International Finance.

Park, J., & Ratti, R. A. (2008). Oil price shocks and stock markets in the U.S. and 13 European countries, Energy Economics, 30(5), 2587-2608.

Papapetrou, E. (2001). Oil price shocks, stock market, economic activity and employment in Greece. Energy Economics,  23(5), 511-532.

Quandt, R. E. (1972). A New Approach to Estimating Switching Regressions. Journal of the American Statistical Association, 67(338), 306-310.