Crude oil and GCC stock markets: New evidence from GARCH co-integration and Granger causality approaches

Abstract

Purpose

This paper aims to investigate the transmission of international oil prices to the stock market indices of the Gulf Cooperation Council (GCC) countries over the weekly period from April 07, 2004, to August 15, 2018.

Design/methodology/approach

The authors use the augmented Dickey–Fuller (ADF) unit root test to check the order of integration of data series. Afterward, the authors use the ordinary least square method to determine the spillover of international oil prices to the stock markets of GCC countries while accounting for the time-varying volatility of oil and stock market returns through the generalized autoregressive conditional heteroskedasticity. Then, the Johansen (1991) cointegration test is used to determine the long-run equilibrium relationship. Finally, the Granger (1969) causality test is used to determine the short-run causal effects between oil and the stock markets returns of GCC countries.

Findings

The findings indicate that the stock markets of GCC countries are efficient and respond significantly to international oil prices and evidence of high volatility associated with oil returns.

Originality/value

Investors and portfolio managers should consider the association between international oil prices and GCC stock returns when allocating their funds for diversification strategy. Moreover, policymakers should better understand the behavior of local stock markets.

Citation

Alqahtani, A., Lahiani, A. and Salem, A. (2020), "Crude oil and GCC stock markets: New evidence from GARCH co-integration and Granger causality approaches", International Journal of Energy Sector Management, Vol. 14 No. 4, pp. 745-756. https://doi.org/10.1108/IJESM-06-2019-0013