Dynamic Relationships Between Dubai Oil Price, Shanghai and KOSPI Stock Markets

Abstract

Recognizing the importance of the relationship between stock market and oil prices, this paper examines the long-term price relationships between the Dubai oil price and stock market returns for two large oil-consuming countries in Asia, namely China and Korea, by estimating the Shanghai Stock Exchange (SSE) Composite Index and the Korea Composite Stock Price Index (KOSPI) from April 16, 2010, to August 31, 2011. The Granger Causality model based on the Vector Autoregression (VAR) model and the Johansen cointegration test are employed. According to the empirical results, the cointegration analysis shows a long-term relationship between the Dubai oil price and the stock market price for the whole sample period for both KOSPI and the SSE Composite Index. In addition, the results of the Granger Causality test indicate that the knowledge of recent Dubai oil price data influences the short-term forecast of KOSPI but not vice versa and that the short-term forecast of returns on current or future Dubai oil prices is affected by the movement of the SSE Composite Index but not vice versa.