Oil price and stock market behaviour in GCC countries: Do asymmetries and structural breaks matter?

Abstract

Although the relationship between the global oil and stock markets has been given extensive critical assessment in the literature, this study gives a re-examination of this nexus for the Gulf Cooperation Council countries with certain innovative contributions. We employ both the Symmetric ARDL by Pesaran et al. (2001) and Nonlinear ARDL by Shin et al. (2014) and we also account for structural breaks using the Bai and Perron (2003) test that allows for multiple structural changes in regression models. Using a weekly dataset from 1992-2016, we observe that most of the GCC stock markets respond asymmetrically to oil price. The need to account for structural breaks is also undeniably seen as the break dates are largely significant. We discovered some breaks which coincidentally correspond to the series of OPEC cuts of 1999, Asian demand soars of 2005 and global financial crisis of 2008, among others. Our robustness check suggests that global economic activity and geopolitical risks are very sensitive to oil price specification, however in a linear fashion which may change conclusions regarding the effect of oil price shocks on stock returns. In all, the findings of this study, especially the large asymmetric responses of the stock markets to oil price, have serious policy implications for the government of each country and potential investors because of their oil-dependent posture.