An examination of the nonlinear causal relationship between oil prices and financial instability using the MS-VAR model

Rezazadeh, Ali; Fattahi, Fahmideh; Mahmoudi-Razgeh, Farouq

doi:10.22111/ijbds.2026.52654.2260

An examination of the nonlinear causal relationship between oil prices and financial instability using the MS-VAR model

Document Type : Research Paper

Authors

¹ Associate Professor, Department of Economics, Urmia University, Urmia, Iran.

² Urmia University

³ PhD Candidate in Economics, Faculty of Economics and Management, Urmia University, Urmia, Iran.

10.22111/ijbds.2026.52654.2260

Abstract

In this study, the nonlinear causal relationship between oil prices and financial instability in the United States was examined using monthly data spanning from 1998:8 to 2023:8. The nonlinear approach known as Markov Switching Vector Autoregression (MS-VAR) model was utilized to analyze the non-linear causal relationship. The findings suggest that in the first regime the intercept in the model, where the dependent variable is oil price, exhibits a negative that is statistically significant at the 10% level. Conversely, the in-tercept is positive and statistically significant in the second regime. Hence, within a model wherein the oil price serves as the dependent variable, the first regime corresponds to the recession regime, while the subsequent one rep-resents the boom regime. Furthermore, in the first regime, the intercept in the model where the dependent variable is the financial instability index is positive and statistically significant at the 10% level. However, in the second regime, it becomes negative and statistically significant. Consequently, the first regime within this second model represents boom, whereas the subsequent regime represents recession. Moreover, the outcomes of the probability matrix sug-gest that the second regime is more stable and absorptive in comparison to the first. In summary, the results of the nonlinear causal relationship indicate that during the first regime, there is a two-way nonlinear causal relationship be-tween the oil price difference and the financial instability index. Conversely, within the framework of the second regime, a one-way nonlinear causal relationship is established from oil price to financial instability.

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