Markov Switching Vector Autoregressive Modelling of the Nigerian Stock Price and Oil Price Series

Emmanuel W Okereke, Onyebuchi Remy Uwaeme



This article studied the relationship between stock prices and crude oil prices of Nigeria using a Markov switching model. Certain properties of the stock price series and crude oil price series such as breaks and stationarity, which are necessary before choosing a multivariate time series model for this relationship were investigated. Unit root and cointegration structural break tests were used where evidence of breaks exists. In particular, each of the series was found to be a nonlinear and nonstationary series with evidence of a structural break. The results of the unit root and cointegration tests in the presence of structural breaks indicated evidence of I (1) and no cointegration between the series. Consequently, a Markov switching VAR (MSM(2)-VAR(1)) model with two regimes was fitted to the data having established the suitability of the series to regime switching models. The results showed that high volatility regime occurs when the economy was under recession. Furthermore, there exists a positive relationship between stock prices and crude oil prices during the high volatility regime and a negative relationship during the low volatility regime.

Keywords: MS-VAR, VAR, Crude oil prices, Stock prices, Markov Switching, Structural break

<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 1"

Full Text:



Adaramola, A. O. (2012). Oil price shocks and stock market behaviour: the Nigerian experience. Journal of Economics, 3(1), 19-24.

Akomolafe, K. J., & Jonathan, D. D. (2014). Oil price dynamics and the Nigerian stock market: An industry level analysis. International journal of economics, finance and management, 3(6), 308-316.

Bai, J., & Carrion-i-Silvestre, J. L. (2004). Structural changes, common stochastic trends, and unit roots in panel data. DOCT. AQR. Departament d’Econometria, Estadística i Economia Espanyola. Universitat de Barcelona.

Bai, J., & Perron, P. (1998). Estimating and testing linear models with multiple structural changes. Econometrica, 47-78.

Bai, J., & Perron, P. (2003). Computation and analysis of multiple structural change models. Journal of applied econometrics, 18(1), 1-22.

Balcilar, M., Gupta, R., & Miller, S. M. (2015). Regime switching model of US crude oil and stock market prices: 1859 to 2013. Energy Economics, 49, 317-327.

Balcilar, M., Van Eyden, R., Uwilingiye, J., & Gupta, R. (2017). The Impact of Oil Price on South African GDP Growth: A Bayesian Markov Switching‐VAR Analysis. African Development Review, 29(2), 319-336.

Brock, W., Dechert, D., Sheinkman, J., and LeBaron, B. (1996). A test for independence based on the correlation dimension. Econometric Reviews, 15(3), 197-235.

Carrion-i-Silvestre, J. L., Kim, D., & Perron, P. (2009). GLS-based unit root tests with multiple structural breaks under both the null and the alternative hypotheses. Econometric theory, 25(6), 1754-1792.

Carrion-i-Silvestre, JL, Artís, M., & Sansó, A. (2004). Unitary roots and structural changes in the Spanish macromagnitudes. Journal of Applied Economics, 12 (35), 5-27.

Clemente, J., Montañés, A., & Reyes, M. (1998). Testing for a unit root in variables with a double change in the mean. Economics Letters, 59(2), 175-182.

Cuestas, J. C., & Tang, B. (2015). Exchange rate changes and stock returns in China: A markov switching SVAR approach. The Sheffield Economic Research Paper Series (SERPS), 201502(024).

Effiong, E. L. (2014). Oil price shocks and N igeria's stock market: what have we learned from crude oil market shocks?. OPEC Energy Review, 38(1), 36-58.

Ekong, N. P., & Ebong, D. W. (2016). On the crude oil price, stock market movement and economic growth Nexus in Nigeria evidence from cointegration and VAR analysis. Asian Journal of Economic Modelling, 4(3), 112-123.

Elliott, G., & Pesavento, E. (2009). Testing the null of no cointegration when covariates are known to have a unit root. Econometric Theory, 25(6), 1829-1850.

Elliott, G., Rothenberg, T. J., & Stock, J. H. (1992). Efficient tests for an autoregressive unit root.

Fowowe, B. (2013). Jump dynamics in the relationship between oil prices and the stock market: Evidence from Nigeria. Energy, 56, 31-38.

Gadea, M. D., Montañés, A., & Reyes, M. (2004). The European Union currencies and the US dollar: from post-Bretton-Woods to the Euro. Journal of International Money and Finance, 23(7-8), 1109-1136.

Gogineni, S. (2008). The stock market reaction to oil price changes. Division of Finance, Michael F. Price College of Business, University of Oklahoma, Norman, 23.

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: Journal of the Econometric Society, 357-384.

Hong, H., Torous, W., & Valkanov, R. (2002). Do industries lead the stock market? Gradual diffusion of information and cross-asset return predictability.

Huang, R. D., Masulis, R. W., & Stoll, H. R. (1996). Energy shocks and financial markets. Journal of Futures Markets: Futures, Options, and Other Derivative Products, 16(1), 1-27.

Iheanacho, E. (2016). Dynamic Relationship between Crude Oil Price, Exchange Rate and Stock Market Performance in Nigeria. African Research Review, 10(4), 224-240.

Ismail, M. T., & Bin Isa, Z. (2009). Modeling the interactions of stock price and exchange rate in Malaysia. The Singapore Economic Review, 54(04), 605-619.

Jones, C. M., & Kaul, G. (1996). Oil and the stock markets. The journal of Finance, 51(2), 463-491.

Khalid, A. M., & Rajaguru, G. (2010). The impact of political events on financial market volatility: evidence using a markov switching process.

Kim, D., & Perron P. (2006). Unit root tests allowing for a break in the trend function under both the null and alternative hypotheses. Unpublished Manuscript, Department of Economics, Boston University.

Krolzig, H. M. (1997b). Markov Switching Vector Autoregression. Modelling, Statistical Inference and Application to Business Cycle Analysis. Berlin: Springer.

Krolzig, H. M. (1998). Econometric modelling of Markov-switching vector autoregressions using MSVAR for Ox. unpublished, Nuffield College, Oxford.

Lee, J. (1996). Testing for a unit root in time series with trend breaks. Journal of Macroeconomics, 18(3), 503-519.

Lee, J., & Strazicich, M. C. (2003). Minimum Lagrange multiplier unit root test with two structural breaks. Review of economics and statistics, 85(4), 1082-1089.

Lumsdaine, R. L., & Papell, D. H. (1997). Multiple trend breaks and the unit-root hypothesis. Review of economics and Statistics, 79(2), 212-218.

Mustapha, I. M., & Masih, M. (2017). Dynamics of islamic stock market returns and exchange rate movements in the ASEAN Countries in a regime-switching environment: Implications for the islamic investors and risk hedgers.

Ng, S., & Perron, P. (2001). Lag length selection and the construction of unit root tests with good size and power. Econometrica, 69(6), 1519-1554.

O’Neill, T. J., Penm, J., & Terrell, R. D. (2008). The role of higher oil prices: A case of major developed countries. In Research in Finance (pp. 287-299). Emerald Group Publishing Limited.

Ogboru, I., Rivi, M. T., & Idisi, P. (2017). The Impact of Changes in Crude Oil Prices on Economic Growth in Nigeria: 1986–2015.

Okere, K., & Ndubuisi, P. ( 2017). The Role of Stock Market Development on Economic Growth in OPEC Countries: Does Oil Prive Movement Matter? Fresh Evidence from Nigeria. Asian Journal of Economic Modelling, Asian Economic and Social Society, 5(2), 194-207.

Okereke, O.E., & Uwaeme, O. R. (2017). Comparing naira to dollar exchange rate forecasting models. Journal of Applied Probability and Statistics, 12(2), 51-64.

Oriavwote, V. E., & Eriemo, N. O. (2012). Oil prices and the real exchange rate in Nigeria. International Journal of Economics and Finance, 4(6), 198.

Osuji, E. (2015). International oil prices and exchange rate in Nigeria: A causality analysis. International Journal of Academic Research in Economics and Management Sciences, 4(3), 11-22.

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

Perron, P., & Rodríguez, G. (2016). Residuals‐based tests for cointegration with generalized least‐squares detrended data. The Econometrics Journal, 19(1), 84-111.

Sadorsky, P. (2001). Risk factors in stock returns of Canadian oil and gas companies. Energy economics, 23(1), 17-28.

Stock, J. H. (1990). A class of tests for integration and cointegration. Cointegration, Causality and Forecasting. A Festschrift in Honour of Clive WJ Granger, 137-167.

Tsay, R. S. (1989). Testing and modelling threshold autoregressive processes. Journal of the Royal Statistical Society B, 84, 231-240.

Wei, C. (2003). Energy, the stock market, and the putty-clay investment model. American Economic Review, 93(1), 311-323.

Yusuf, M. (2015). An analysis of the impact of oil price shocks on the growth of the Nigerian economy: 1970-2011. African journal of business management, 9(3), 103.

Zivot, E., & Andrews, D. W. K. (1992). Further evidence on the great crash, the oil-price shock, and the unit-root hypothesis. Journal of business & economic statistics, 20(1), 25-44.



  • There are currently no refbacks.

This journal is indexed by:


ISSN: 2621-5918

Creative Commons License

This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.