TAILIEUCHUNG - Oil prices and stock markets: what drives what in the Gulf Corporation Council countries?

However, less attention has been paid to smaller emerging markets, especially in the GCC countries where share dealing is a relatively recent phenomenon. Using VAR models and cointegration tests, Hammoudeh and Eleisa (2004) show that there is a bidirectional relationship between Saudi stock returns and oil price changes. The findings also suggest that the other GCC markets are not directly linked to oil prices and are less dependent on oil exports and are more influenced by domestic factors. Bashar (2006) uses VAR analysis to study the effect of oil price changes on GCC | The William Davidson Institute AT THE UNIVERSITY OF MICHIGAN Oil prices and stock markets what drives what in the Gulf Corporation Council countries By Christophe Rault Mohamed El Hedi Arouri William Davidson Institute Working Paper Number 960 June 2009 Oil prices and stock markets what drives what in the Gulf Corporation Council countries Mohamed El Hedi AROURI LEO University of Orleans and EDHEC 1 Christophe RAULT LEO University of Orléans CESifo IZA and William Davidson Institute2 Abstract In the empirical literature only few studies have focused on the relationship between oil prices and stock markets in net oil-importing countries. In net oil-exporting countries this relationship has not been widely researched. This paper implements the panel-data approach of Kónya 2006 which is based on SUR systems and Wald tests with country-specific bootstrap critical values to study the sensitivity of stock markets to oil prices in GCC Gulf Corporation Council countries. Using two different weekly and monthly datasets covering respectively the periods from 7 June 2005 to 21 October 2008 and from January 1996 to December 2007 we show strong statistical evidence that the causal relationship is consistently bi-directional for Saudi Arabia. Stock market price changes in the other GCC member countries do not Granger cause oil price changes whereas oil price shocks Granger cause stock price changes. Therefore investors in GCC stock markets should look at the changes in oil prices whereas investors in oil markets should look at changes in the Saudi stock market. Key words GCC stock markets oil prices. JEL classifications G12 F3 Q43. 1 Université d Orléans LEO CNRS UMR 6221 Rue de 45067 Orléans Cedex 2 France and EDHEC. Email . 2 Université d Orléans LEO CNRS UMR 6221 Rue de 45067 Orléans Cedex 2 France CESifo and IZA Germany and William Davidson Institute at the University of Michigan Ann Arbor Michigan USA email .

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