Regime dependence in the oil-stock market relationship: The role of oil price uncertainty

We compare the interaction between the crude oil and US stock markets in regimes where oil price uncertainty is high versus low, using a smooth transition vector autoregressive model. Our results show that supply- and demand-side shocks from the oil market, as well as stock market shocks, tend to have greater effect sizes in the lower oil price uncertainty regime. These asymmetric findings are consistent with the premise that shocks occurring in a relatively calmer environment are inclined to surprise market participants more, thereby eliciting amplified responses, than during an environment where oil price uncertainty is anticipated to be higher. • We compare oil and stock market interactions using a smooth transition VAR model. • We account for market interactions in high v. low oil price uncertainty regimes. • Shocks have greater effects in lower oil price uncertainty regimes. • Calmer environments amplify market responses due to unexpected nature of shocks. • Higher uncertainty regimes reduce shock impact due to anticipation by markets.