Commodity Price Effect on Stock Market: A Markov Switching Vector Autoregressive Approach

Real economic data always present nonlinear properties such as asymmetry and radically change in the series through time. Missing data and jumps as well as breaks also common reported in economic time series model. Thus, linear models are no longer suitable used in estimate the economic data and markov switching vector autoregressive model (MS-VAR) is applied in study the economic model. This paper will present the analysis of commodity price effect on stock market by using markov switching vector autoregressive model. Oil price and gold price are selected to represent the commodity price and the influence of those prices on Malaysia, Singapore, Thailand and Indonesia stock market are investigated. Furthermore, the mean adjusted markov switching vector autoregressive model (MSM-VAR) and mean adjusted heteroskedasticity markov switching vector autoregressive model (MSMH-VAR) are investigated to determine the suitable specification of the model in providing a more significance and reliable result when analysis the economic relationship model between oil price, gold price and stock market returns.