The nexus between oil price and stock market: Evidence from South Asia

Abstract

We examine the interactive link between oil prices and the stock market in the 4 selected South Asian countries using a Nonlinear Autoregressive Distributed Lag (NARDL) model for 1997–2018. We find a positive relationship between the world oil price and stock market index, and the response of the stock market index to positive and negative oil price shocks is asymmetric. Our results further reveal that higher oil prices in the world market stimulate stock price, suggesting that the South Asian countries do not follow the Efficient Market Hypothesis (EMH). We recommend that the policymakers take initiatives to make the South Asian stock market more efficient by removing the barriers to stock market development, developing the country’s infrastructure, enhancing the stock market’s capacity, and restoring the confidence of the market participants within the region.

Keywords

• Oil price
• Stock market
• NARDL
• South Asia
• Efficient market hypothesis
• Asymmetry