Financial markets interaction: an application of probabilistic Markov model and ARDL approach

Abstract

In the context of the last world financial crisis, the interconnection between the different markets is arising as a serious problem ; which made a situation of uncertainty about the trend and direction of causality among these markets.This paper examined the causality and long-run relationships between Oil Price, Gold price and Dollar index using ARDL approach and a Probabilistic Markov Models over the period  (1986-2016).The findings reveal that: i) A positive trend of Gold prices; which can take a big bull market . ii) A symmetric dynamic structure of Oil prices . iii) Stable, long-run relationship exists between Oil prices and Gold prices. iv) The evidence also suggests that the US dollar index as indicator has no effect on Oil prices. v) Model stability results also reveal that after incorporating the CUSUM and CUSUMSQ tests, Oil price function is stable over the period (1986-2016).

Key words: Markov Models, ARDL, Oil, Gold, Dollar index.