Non-Linear Relationships Among Oil Price, Gold Price and Stock Market Returns in Iran: A Multivariate Regime-Switching Approach

In this paper, the effects of oil and gold prices on stock market index are investigated. We use a cointegrated vector autoregressive Markov-switching model to examine the nonlinear properties of these three variables during the period of January 2003 - December 2014. The Markov-switching vector-equilibrium-correction model with three regimes representing "deep recession", "mild recession" and "expansion" provides a good characterization of the sample data. The results of the model show that the impact of oil price on stock returns is positive and significant in the short run. However, it has negative effects on stock market in the long run. Moreover, we find out that the relationship between gold price and stock market returns varies during the period under investigation depending on the market conditions. More specifically, the positive gold price shock decreases the stock market returns in the short run (10 months), while it increases the stock market returns in the medium and long run.