The sensitivity of GCC firms’ stock returns to exchange rate, interest rate, and oil price volatility

Mariam Alenezi,Ahmad Alqatan,Obby Phiri

doi:10.22495/cocv17i4art3

Abstract

This study seeks to investigate the sensitivity of stock returns to exchange rate, interest rate and oil price volatility in the Gulf Cooperation Council (GCC) countries. It employs both the multivariate ordinary least square (OLS) regression and the exponential generalized autoregressive conditional heteroscedastic in mean (EGARCH-M) models to analyse the data collected from Bloomberg and DataStream on the GCC countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates) for the period January 2007 to June 2012. The study shows that stock returns in GCC countries are influenced by the exchange rate risk, interest rate risk and oil price risk. However, the exposure is highest for exchange rate risk and lowest for interest rate risk. While the effects of these risks were mixed, overall, exchange rate risk and oil price risk showed a positive and significant relationship as compared to the interest rate risk that showed a negative significant effect on firm values. The level of the effect of these risks also differed from country to country. Further, foreign operations and firm size had a significant influence on the extent of the firms’ exposure to all three risks. The study findings suggest that the volatility of stock returns affected by changes in the risk factors could indicate non-prioritisation of risk management by firms. This has implications in terms of consideration of the long-term exposure of firms to these three risks and thus, the need for effective risk management strategies.

Highlights

Macroeconomic variables (such as gross domestic product (GDP), interest rates, exchange rates, price level, industrial production rate, unemployment rate) are generally volatile, constantly changing
Where αi is the intercept term for firm i; Rit is the returns of the firm in period t; RMt is the market portfolio returns in period t; XRt presents the percentage changes in exchange rates over time t; SRt is the changes in short term interest rate over time t; LRt is the changes in long term interest rate over time t; ORt is the changes in oil prices over time t; and εit represents the error term with zero mean, constant variance and assumed normal and independent distribution
The stock returns in Qatar and Saudi Arabia had the highest volatility of 2.8392% and 2.5851% respectively while the lowest stock fluctuations were observed in Kuwait at 0.0259%

Summary

Introduction

Macroeconomic variables (such as gross domestic product (GDP), interest rates, exchange rates, price level, industrial production rate, unemployment rate) are generally volatile, constantly changing. The changes in these macroeconomic variables have an influence on stock market returns (English, Van den Heuvel, & Zakrajšek, 2018; Maheshwari, 2020; Mollick & Sakiki, 2019; Parab & Reddy, 2020). The changes in these macro-economic variables are examined in order to assess their effect on the firm values as reflected in the share prices This is accomplished through establishing a cause and effect relationship between exchange rate returns, interest rate returns, oil price returns and stock returns

Methods

Results

Conclusion