Extreme dependence between structural oil shocks and stock markets in GCC countries

Abstract

This paper investigates how extreme oil price shocks affect the stock market returns of major oil-exporter countries (Gulf Cooperation Council [GCC] countries) at different time horizons. We contribute to the literature by examining the extreme co-movements (tail dependence) between the different sources of oil price shocks and stock market returns directly by testing the tail dependence of the joint distribution across frequencies. Our methodology incorporates the recent oil shock decomposition of Ready (2018) with a novel quantile cross-spectral dependence approach of Baruník and Kley (2019) and wavelet coherence analysis for the period of June 1, 2006 to February 28, 2020. These two approaches enable the detection of the dependence structure during extreme market conditions (bearish and bullish markets) and/or at different time horizons (frequencies). Examining the strength of co-movement between the GCC stock market returns and disaggregated oil shocks may impact the GCC-country portfolio's value at risk levels. The findings provide potential implications for portfolio investors in the GCC region, who could consider co-movement through both return quantiles dependence and time frequencies when designing their portfolios.