AIB-MENA 2016 Paper Development Workshop 31 August-1 September, 2016, Dubai, UAE. Recent evidence on the oil price shocks on GCC stock markets

Transcription

1 AIB-MENA 2016 Paper Development Workshop 31 August-1 September, 2016, Dubai, UAE Recent evidence on the oil price shocks on GCC stock markets Suzanna El Massah College of Business Zayed University, UAE and Victor Wong Dept. of Accounting, Finance and Economics, Griffith University, Australia

2 Outline Introduction Objective/ Contribution Literature Review (details in the paper) Data Methodology Results Implications of the findings Future research 2

3 GCC countries» Six countries among the MENA countries, Bahrain, Kuwait, Oman, Qatar, KSA and UAE» World major oil producers (half the world s oil reserves) and OPEC members. Main aim:» Find out the impact of oil-price changes on GCC stock markets in 10-year period,

4 Objective The objective of this paper is to answer the following: What is the causality relationship between oil prices and GCC stock markets? To what extend are GCC stock markets integrated? How long does it take for GCC stock markets to absorb the oil price s influence? 4

5 Our argument Theory claims that reduction in oil prices cause reduced earnings reducing stock prices. A lower oil price increases aggregate stock prices either directly by affecting future cash flows, or indirectly through the effect of interest rates used to discount the cash flows (Basher et al., 2012). A falling oil price may be beneficial for end consumers; however, it would reduce profits for GCC oil exporters. 5

6 Contribution Adding a perspective into the recent geo-political debate on oil. Examining the dynamics of oil price influence on GCC markets would allow policy makers, regulators, investors, portfolio managers at both country and international levels to.. Prepare and forecast any changes anticipated from oil price shocks. 6

7 Literature Review: large volume of empirical studies on the relation between oil prices and stock markets prices, focused on developed countries - net oil-importers.» have generally confirmed a significant negative impact of oil price changes on stock markets (Charles & Kaul, 1996; Huang et al., 1996; Papapetrou, 2001; Park and Ratti, 2008; Kaneko and Lee 1995 and many others). Few studies investigated this relation in the net oil-exporting countries, emerging markets, and GCC in particular, and their results are inconsistent. 8

8 Data description Weekly data from the S&P Broad Market Index for the stock market data. All the data are in $US, returns on the price indices calculated by the formula: R t = ln(price t /price t-1 ) 100. weighted based on weekly stock market values to control for market sizes. Oil data from Brent Crude Oil traded on Intercontinental Exchange. The sample period for the study is from January 7, 2005 to December 25, 2015, with a total observation of 573 weeks. 9

9 Methodology Vector-autoregressive (VAR) Model (Sims, 1980) Y t = Π 1 Y t 1 + Π 2 Y t Π p Y t p + ΘX t + u t» Granger causality (Granger, 1969) Which market is affecting other markets?» Generalised impulse response (Pesaran & Shin, 1998) How long does it take for a market to absorb shock within the markets? What is the effect of oil shock on volatility/integration? 10

10 Results Descriptive statistics for the S&P Broad Market Index (weekly returns) Bahrain Kuwait Oman Qatar KSA UAE OIL Mean Std. Dev Skewness Kurtosis Jarque-Bera Probability ADF PP Correlation OIL between Notes: * The Jarque-Bera, Augmented Dickey-Fuller (ADF) and Phillip Perron (PP) tests are significant and the results show the data is normally distributed and stationary. 11

11 Results: Granger causality Significant linkages between oil prices and GCC stock market Dependent variables Independent variables Bahrain Kuwait Oman Bahrain Kuwait Oman Qatar KSA UAE OIL *** ** ** *** * * *** * Qatar KSA UAE Oil * * ** * *** *** *** *** ** ** all markets have a significant coefficient at 1%, 5% and 10% levels of significance either as a market influencing another market or as a market that is being influenced. 12

12 GCC markets are interconnected in the short run (interdependence). oil-price shocks Granger-cause changes in all GCC stock markets, except Oman due to the small size of Oman s oil market. Kuwait, KSA and UAE are highly affected by movements in oil prices (major oil producers) Kuwait, KSA, and UAE should start urgent economic diversification, since they serve as a transition of oil impact to other GCC stock markets. Kuwait & Qatar are the most influenced by other markets, (the degree of market openness & foreign ownership restrictions. Bahrain OIL Kuwait UAE Oman KSA Qatar 1% significant 5% significant 10% significan

13 How long does it take for a market to absorb shock within the markets? The shorter and the faster the interaction is the more integrated the markets are. While, the longer and the slower the interaction is the less integrated the markets are. 14

14 Results: Generalised impulse response Duration and speed of interaction between oil and stock markets All GCC (except Bahrain, Kuwait and KSA) are immediately affected by the oil shocks. Majority responses are absorbed within 2 weeks, and fully absorbed within a period of 5-6 weeks. KSA has the highest magnitude response to oil shocks, followed by UAE & Qatar BAHRAIN KUWAIT OMAN QATAR KSA UAE Responses of GCC stock markets to OIL shocks

15 Such results point toward increased integration and volatility between GCC stock markets after oil price shocks» Why? strong dependence on oil and low level of sectorial diversity. 16

16 Implications of findings The significant impact of regional spillovers to local equity markets» points to the need for cross-border coordination and supervision to minimize adverse spillover effects. KSA, UAE, and Kuwait are significantly affected by oil price changes, and therefore transmit this effect to other GCC markets,» they are particularly in need of a greater focus on economic diversification. 17

17 Implications of findings The study implies a degree of predictability of the GCC stock markets, GCC countries are also part of OPEC and movements in oil prices would have regional impacts on GCC economies and stock markets.» Investors ought to reconsider their international portfolio diversification by looking at oil price movement. Government authorities and policy makers in the GCC should take proper regulatory decisions in stock market and oil pricing policies 18

18 Future research Our study can be extended further to examine individual stock market sectors more in-depth analysis to examine how the linkage between oil and stock markets vary across different sectors within GCC. Further research could also employ different international stock markets, not limited to GCC, to provide more robust findings.» Compare between oil-importing and exporting countries. 19

19 Thank you Comment / Feedback / Discussion 20