Investigating Stock Price Dynamics in an Oil-Dependent Economy: The Case Of Kuwait

Abstract

The recent literature on stock markets has used modem time series techniques such as cointegration and causality to identify macroeconomic variables that cause stock index movements. But this type of investigation has to a large extent remained confined to markets belonging to well developed and diversified economies. Motivated by the lack of set-ups involving stock markets from economies with different profiles, this paper concentrates on the Kuwaiti stock market whose unique features as an oil-dependent economy render its investigation a useful exercise. Based on mutivariate time-series techniques and using monthly data spanning the period September 1992 to December 1998, the investigation reveals three important factors that are believed to have long-term equilibrium effects on stock market prices in Kuwait. Oil prices, U.S. interest rates and real estate prices are found to form a cointegrating relationship with stock prices. The results in this paper indicate clearly a sharp contrast in terms of stock market dynamics between an oil-dependent economy like Kuwait’s and those of highly diversified economies. It is argued that the reported results are nevertheless logical in light of the unique features of the oil-dependent Kuwaiti economy.