Investigating the Effect of Oil Price Shocks on Stock and Gold Prices During Periods of Decline and Increase in Oil Prices

This paper presents a differentiated approach for assessing the effect of oil price changes on gold price and the stock index, during upward and downward movements, using the Markov Switching Bayesian VAR model to analyze data for Iran over the period 2009 to 2016.  We study the non-linear relationship between the price of oil and gold and the stock market index during periods of price decrease (called data set 1) and periods of price increase (data set 2). We use the Brock Dechert and Shinkman test and the likelihood ratio to prove that the relationship between the price of gold and the Tehran stock exchange index with oil price is nonlinear. We aim to examine the relationship between the prices of gold and the value of the Tehran stock exchange index, as two key financial assets, and oil prices during upward and downward price movements in a manner that leads to specific predictions.  This research should allow investors to avoid losses due to decisions based on the thinking that the direction of causality between oil prices and asset prices remains the same during increasing and decreasing phases.  The estimated values of our model suggest that during periods of declining oil prices gold and the stock exchange index both increase in value, while the impact on gold is greater than on the stock exchange index. We find that during periods of rising oil prices, gold prices also increase, while the value of the Tehran stock exchange index tends to be negative, though the rate of decrease slows down over time.