Threshold cointegration relationships between oil and stock markets

The aim of this paper is to study the oil price adjustment dynamics and to implicitly test the efficiency hypothesis for the oil market. Thus, we propose to study the oil price evolution in a nonlinear framework while testing the interdependence hypothesis between oil and stock markets. Four countries, the USA, France, Mexico and the Philippines are concerned by our findings which show several important results. Firstly, we show some evidence of linear linkage between stock markets and oil industry and we prove the existence of significant long-run relationships between oil and stock markets, indicating that the oil market is not efficient. Secondly, using nonlinear cointegration techniques, we propose a new nonlinear modeling to reproduce the oil price adjustment dynamics. It takes into account both stock and oil market variations. More importantly, the oil price is nonlinear, mean-reverting toward the equilibrium and with an adjustment speed that increases according to oil price deviations toward the stock market equilibrium.