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Wild oil prices, but brave stock markets! The case of GCC stock markets

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Abstract

Using a vector autoregression (VAR) analysis, this paper investigates the effect of the sharp increase in oil prices on stock market returns for five Gulf Cooperation Council (GCC) countries (Bahrain, Kuwait, Oman, Saudi Arabia, and Abu Dhabi). The empirical investigation is conducted using daily data from 25 May, 2001 to 24 May, 2005. During this period oil price has been doubled the thing that led to great surplus in cash in these markets and positively affected their performance. Our empirical evidence suggests the following: (i) The predictive power of oil prices has been increased after the raise in oil prices, while both Saudi and Omani markets only have the power to predict oil prices. (ii) By analyzing the impulse response function, the response of these markets to shocks in oil prices has increased and became faster after the raise in oil prices. (iii) The Saudi market is more responsive to shocks in oil prices and vice versa.

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Correspondence to Bashar Abu Zarour.

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Zarour, B.A. Wild oil prices, but brave stock markets! The case of GCC stock markets. Oper Res Int J 6, 145–162 (2006). https://doi.org/10.1007/BF02941229

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Keywords

  • Gulf Cooperation Council (GCC)
  • vector autoregressive model
  • variance decomposition
  • impulse response function