Abstract
This paper has two aims. First, we study the impact of oil price variables (change and volatility) on stock market returns under regime shifts in the case of Gulf Cooperation Council (GCC) countries. We employ a Markov regime-switching model to generate regime probabilities for oil market variables. We use two state Markov switching models: crisis regime and non-crisis regime. Second, we investigate the non-linear relationship among oil price, interest rates and inflation rates before and during the subprime crisis. We consider several Archimedean copula models with different tail dependence structures, namely, Gumbel, Clayton and Frank copulas. We find evidence that the relationship between GCC stock market returns and OPEC oil market volatility is regime dependent (excluding Oman in the low volatility state). We also find that the dependence structure between inflation rates and crude oil prices is asymmetric and orients toward the upper side during the recent financial crisis. Furthermore, we find evidence of significant symmetric dependence between crude oil prices and the short-term interest rate during the financial crisis. These paper's results have practical significance and important implications for both GCC economic policy and financial stability. (C) 2013 Elsevier Inc. All rights reserved.