Instability and dependence structure between oil prices and GCC stock markets

Abstract

This paper investigates the dependence structure between daily oil price changes and stock market returns in six GCC countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates) during the period from June 1, 2005 to February 11, 2013. For that, we apply copula functions that capture several dependence structures. The empirical results provide evidence of positive and asymmetric dependence between oil price changes and stock market returns. All countries (except Oman) exhibit left tail dependence while Oman shows right tail dependence. Moreover, we check whether the dependence structure is constant over time using change point testing method. The empirical results indicate significant change in the dependence structure. For all countries, the copula parameters and tail dependence coefficients are greater during financial period than tranquil implying a presence of contagion effect.