Examining the Threshold Effects of Financial Stress on the Behavior of Oil and Stock Markets in Selected OPEC Member Countries
Keywords:
Financial stress, oil market, stock market, panel smooth transition regression (PSTR) model.Abstract
The objective of this article is to examine the threshold effects of financial stress on the behavior of the oil and stock markets. For this purpose, the Panel Smooth Transition Regression (PSTR) model was employed based on annual data from selected OPEC member countries during the period 2005–2023. According to the results of the first model, which relates to the stock market where the transition variable is the financial stress index, the stock return function and the effect of the financial stress index on stock returns are modeled. Given the confirmation of the nonlinear model, the analysis then turns to the nonlinear results. Based on the estimation of the nonlinear part of the model, the coefficient of the financial stress index (FSI) variable equals -0.23, indicating the negative effect of financial stress on stock returns in the selected countries. Considering the corresponding probability of this coefficient, which equals 0.0053 and is less than 0.05, this effect is statistically significant at the 95% confidence level. In the second model, which focuses on the oil market and again uses the financial stress index as the transition variable, the oil market function and the effect of the financial stress index on the oil market in the selected countries are modeled. Given the confirmation of the nonlinear model, the analysis again proceeds to the nonlinear results. According to the estimation results, the coefficient of the financial stress index variable equals 0.17, indicating the direct effect of this variable on the oil market (oil prices) in the selected countries. Considering the corresponding probability of this coefficient, which equals 0.0126 and is less than 0.05, this effect is statistically significant at the 95% confidence level. It should be noted that a large part of the increase in financial stress in the economies of the selected OPEC member countries (through channels such as political tensions, government financial pressures, currency tensions, and ultimately monetary tensions) stems from the failure to achieve endogenous growth and economic sustainability. Therefore, the ultimate path toward long-term improvement emphasizes economic growth, and creating the conditions for economic growth is largely dependent on controlling economic instability. Thus, one of the fundamental requirements for enhancing production levels and achieving endogenous economic growth is paying attention to political relations and striving to reduce political tensions.
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