Economic Diversification and the State of Oil Dependency of UAE Stock Returns-An Analysis of ADX Indices 2014-2019

Abstract

Impact of commodity price risk on stock return remains an important forecasting parameters across stock markets of developed and emerging markets. In recent times the subdued oil price poses a challenge to the economic imbalance among oil producing countries, and thus non-oil diversification has been adopted as an economic solution. Amongst the GCC countries, the intensity of non-oil diversification has been found to be higher in the UAE which prompted to conduct a separate study of impact of oil price volatility on stock returns of Abu Dhabi Securities Market General Index and various sectoral indices. This study examines whether UAE stock returns are still associated with changes in oil price as reported in earlier research despite significant improvements in non-oil sector GDP contributions. The empirical assessment is based on weekly returns of the Abu Dhabi Stock Market General Index and four sectoral indices, namely, banking, industrial, energy and real estate in relation to variations in weekly WTI prices for the period between 1st week of 2012 to 29th week of 2019, i.e., for a period of 392 weeks applying Vector Error Correction model and Granger Causality test. It is found that there exists both long run and short run association between oil price volatility and stock return except model misspecification in respect of industrial and energy sectors arising out of serial correlation. Two lagged weekly oil price movements are found to be strong explanatory variables of stock returns.