The impact of the United Arab Emirates' macroeconomic variables on Emirati stock market indexes

Abstract

The goal of this study is to determine whether some of the United Arab Emirates' (UAE's) macroeconomic variables have explanatory power on the Emirati stock market by applying cointegration and Granger causality tests from vector autoregressive (VAR) and vector error correction (VEC) models. Identifying variables with a statistical power of predicting cycles of business expansion and contraction in the UAE may be extremely beneficial for business planning purposes. Time series that can anticipate, concur, or lag fluctuations of the Emirati economic cycles reliably may also prove to be extremely valuable for Emirati government officers and policy-makers. The studied macroeconomic variables include the Dubai crude oil price, the Emirates Interbank Offered Rate, the UAE's money supply, the effective exchange rate, and the Emirati consumer price index. Monthly data were obtained for each variable from December 2011 to October 2018. Our results provide evidence of unidirectional and bidirectional short-term Granger causality between two Emirati stock market s indexes and the UAE's money supply. Similarly, we find evidence of unidirectional short-term Granger causality between the Emirati stock market indexes and oil prices. Also, our results suggest a cointegration or long-run equilibrium relationship between five relevant UAE's macroeconomic variables and two Emirati stock market indexes.