The sensitivity of GCC firms’ stock returns to exchange rate, interest rate, and oil price volatility

Abstract

This study seeks to investigate the sensitivity of stock returns to exchange rate, interest rate and oil price volatility in the Gulf Cooperation Council (GCC) countries. It employs both the multivariate ordinary least square (OLS) regression and the exponential generalized autoregressive conditional heteroscedastic in mean (EGARCH-M) models to analyse the data collected from Bloomberg and DataStream on the GCC countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates) for the period January 2007 to June 2012. The study shows that stock returns in GCC countries are influenced by the exchange rate risk, interest rate risk and oil price risk. However, the exposure is highest for exchange rate risk and lowest for interest rate risk. While the effects of these risks were mixed, overall, exchange rate risk and oil price risk showed a positive and significant relationship as compared to the interest rate risk that showed a negative significant effect on firm values. The level of the effect of these risks also differed from country to country. Further, foreign operations and firm size had a significant influence on the extent of the firms’ exposure to all three risks. The study findings suggest that the volatility of stock returns affected by changes in the risk factors could indicate non-prioritisation of risk management by firms. This has implications in terms of consideration of the long-term exposure of firms to these three risks and thus, the need for effective risk management strategies.

Macroeconomic Determinants of Stock Market Returns in the Gulf Cooperation Council

“…Ultimately, the findings of the study indicate that oil prices and other macroeconomic determinants have a significant impact on stock prices. This paper contributes in the existing literature in the GCC region by providing an understanding of stock markets from a macroeconomic perspective, which is shown to support previous studies on the same subject in the GCC, such as of Alenezi et al, (2020).…”

Are Kuwaiti Stock Returns Affected by Fluctuations in Oil Prices?

“…Macroeconomic factors include, but are not limited to interest rates, exchange rates, oil prices, and the money supply. A recent study conducted about firms in the Gulf Cooperation Council (GCC), which used three parameters (exchange rates, interest rates, and oil prices) to investigate their relationship to stock returns, suggested that the results vary from one industry to another (Alenezi et al, 2020). In Kuwait, financial firms were less exposed to fluctuations in exchange and interest rates than nonfinancial firms.…”