Abstract
Oil dependent economies of GCC countries had passed through various cycles of boom and trough of oil price. In the aftermath of the economic recession of 2008 and oil price, the GCC countries have been pursuing plans for diversifying to non-oil revenues. The oil of 2014-16 raised the issue of stock market cointegration to oil price movement in the background of non-oil diversification.This research study analyzes long term cointegration of oil price and GCC stock indices, and also cointegration among the GCC stock indices per se in an attempt to investigate if there is any early sign of disintegration of GCC stock markets from oil price cyclicality. The study period is linked to cyclicality of oil price: the first period comprising of Jan 2006- Dec. 2011 that covers oil price cycle during economic recession of 2008, and the second period comprising of Jan 2012 –September 2016 which covers the post-economic recession oil price cycle. The null hypotheses is that oil price and stock market indices are co-integrated.Based on Johansen Cointegration test on Box Cox transformed data of oil price and seven stock market indices of GCC countries, it is found that oil price and GCC stock markets are co-integrated. Analysis using Augmented Dickey- Fuller test and Phillips –Perron test shows that data series are all I (1). This study establishes that efforts to reduce oil dependency in GCC countries is yet to result in decoupling of financial markets from oil price cyclicality. This study also establishes that GCC stock markets per se are co-integrated but factors of cointegration beyond oil price are not explored.
Highlights
Gulf Cooperation Council (GCC) countries except Kuwait are dollar pegged while Kuwait is pegged to a basket of currency
The study investigates if there is any early sign of disintegration of GCC stock markets from oil price cyclicality because of non-oil diversification efforts
This paper re-establishes that GCC stock cointegrated with oil price during the periods of two recent oil slumps
Summary
Gulf Cooperation Council (GCC) countries (see details in Appendix) except Kuwait are dollar pegged while Kuwait is pegged to a basket of currency. Oil dependency of these countries, measured in terms of ‘Fiscal Oil Revenues’ as per cent of ‘Total Fiscal Revenues’, has increased over the years despite planned attempt to increase non-oil revenues. The essential fall outs of the oil during 2014-16 in oil dependent nations are budget deficit and reduced Government spending. This caused decline in stock prices across GCC countries on the apprehension of lowered corporate earnings (Figure 1 & Table 1). Prospects for a return to surplus rest heavily on a recovery in oil prices, and fiscal consolidation efforts
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