Oil and stock market interlinkages: The case of the GCC bloc

Abstract

Motivated by increased stock market integration, gaps in the literature and the recent financialization of oil markets, this thesis studies the behaviour of the fledgling Gulf Cooperation Council (GCC) stock markets against innovations in international financial markets and oil prices. The key results of the thesis highlight the relative segregation of the GCC markets and the importance of the EU and the UAE in determining the inter- and intra-regional equity linkages, respectively. In terms of their reactions to oil shocks, similar to the financial markets of oil-exporting nations, the GCC markets are stimulated by oil precautionary demand shocks during bearish phases, yet, the intensity of the impact is significantly more pronounced. Also, oil price change is a key factor of the US-GCC and EU-GCC stock market interdependence. Finally, oil innovations display upper tail dependence with US-GCC and EU-GCC correlations. The dissertation contributes to the existing literature by remapping the information transmission mechanism in the GCC by examining the inter- and intra-regional linkages in the GCC while considering both mean and variance linkages. Additionally, using the Kilian (2009) method, the thesis contributes to the literature by examining oil shocks influence on the GCC markets in contrast to their counterparts in oil-exporting and importing economies. Notably, this research characterises the oil-equity relation depending on the type of oil shock, the energy profile of the country and the state of the financial market. Finally, for the first time in the macroeconomic literature, the thesis establishes oil as a key macroeconomic determinant in the GCC stock market interdependence. The results present the GCC as a fresh destination to welcome funds from global investors and portfolio managers interested in cross-country diversification benefits. Also, oil price change is presented as a tool to forecast equity correlations which is vital for portfolio construction and balancing efforts. The outcome of the thesis conveys information for domestic policymakers in the GCC attempting to formulate macroeconomic policies. Finally, the outcomes contribute to academic efforts in understanding the interrelations between financial markets in the context of emerging/frontier markets.