Oil-stock nexus: the role of oil shocks for GCC markets

Abstract

Purpose This study aims to examine the links between oil price shocks and Gulf Cooperation Council (GCC) stock markets from February 2004 to December 2019. Knowledge of such links is important to both investors and policymakers in understanding the transmission of shocks across markets. Design/methodology/approach The authors use the Ready (2018) oil price decomposition method and the quantile regression approach to conduct the analysis. Findings Initial results show a positive oil price change increases stock returns, while greater volatility decreases returns. The oil shock decomposition results reveal a significant positive impact of supply-side shocks on stocks. This contrasts with the literature that argues demand-side shocks are more important. While factors such as liquidity and the lack of hedging instruments can increase the vulnerability of GCC equities to oil price shocks, the result reflects the unique economic structure of the GCC bloc, notably, marked by dependency on oil revenues. In analysing quantile-based results, oil supply shocks mainly exhibit lower-tail dependence, while the authors do uncover some evidence of demand-side shocks affecting mid and upper-tail dependence. Originality/value Acknowledging the presence of endogeneity in the relation between oil and economic activity, to the best of the authors’ knowledge, this study is the first to combine the oil price decompositions of Ready (2018) with a quantile regression framework in the GCC context. The results reveal notable difference to those previously reported in the literature.

The Nexus between Oil Price and Stock Returns from a Global Economic Perspective

“…The conclusion demonstrates a strong relationship between crude and cryptocurrencies in times of fiscal disruption like the global coronavirus pandemic. In a different study, Ziadat and McMillan (2022) found that while higher volatility lowers return, a favorable rise in the price of oil enhances stock returns.…”

Predicting Stock Market Volatility Using MODWT with HyFIS and FS.HGD Models

“…Alkhatib et al (2022) looked at the influence of the COVID-19 pandemic on stock markets in the Gulf Cooperation Council (GCC) countries, The analysis revealed that the pandemic had a major influence on volatility dynamics and stock returns in the region, with different sectors being affected differently. (Ziadat and McMillan 2022) investigated the relationship between oil prices and stock market returns from January 2004 to December 2019, using the Ready oil price decomposition method and quantile regression approach. Their study found a significant relationship between oil prices and stock market returns in both the short and long run, with oil prices having a notable effect on stock returns.…”