Assessing Oil Price and Stock Market Nexus in GCC: The Impact of the COVID-19 Pandemic and the Russia–Ukraine War
Abstract
Purpose: An oil economy is usually driven by an economy, and economic performance is explained by following the stock market performance. Although some studies have aimed at the oil prices-stock market nexus and how various developments affect the nexus, a gap still exists in studies carried out in GCC countries. This work seeks to harness how the two significant world shocks, including the COVID-19 pandemic and the Russia-Ukraine War, have influenced the oil prices-stock market nexus in the GCC countries with directional hypotheses clearly defined on the basis of the demand-supply shock theory.
Methodology: Stock returns of GCC countries and crude oil prices on a daily basis were calculated between 1st January 2017 and 31st December 2022. To overcome non-normality, the study uses descriptive statistics, normality and stationarity tests, and the GARCH (1,1) model with the Researcher t error distribution. Dummy variables in both the mean equation and variance equation of the GARCH model are introduced as event windows of COVID-19 (11 March 2020 to 31 December 2020) and the war in Russia and Ukraine (24 February 2022 to 31 December 2022) that allow the analysis of the mean effects and conditional volatility at the same time.
Results: Stock markets in the majority of GCC countries have a positive correlation with oil prices, which is in line with the economies being oil exporters, but statistically insignificant with most indices. Saudi Arabia has the most sensitive Tadawul to changes in oil prices. The COVID-19 pandemic and the Russia-Ukraine war did not cause any impactful and long-lasting effects on the oil price and stock market nexus in the GCC countries. The disruptions were also dramatic and transient, and the oil market reabsorbed the shocks during the period of observation.
Practical Implications: The oil and gas supply chains of GCC economies have now become resistant to structural disruptions. The negative yet insignificant nexus of oil stocks in the majority of GCC markets indicates the short listings of oil and gas companies in these markets rather than the absence of economic connectivity. Further research can be done by taking shorter event windows and firm-level data.
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