Volatility spillover effect of emerging markets and economic growth versus oil price volatility : the case of the Gulf Co-operation Council countries

Abstract

The relationship between stock markets returns, economic growth and oil price volatility has been an issue of considerable debate. While there are many studies showing that oil price shocks have significant effects on the economy, fewer studies have examined the relationship between oil prices, stock markets and gross domestic product (GDP), and even less research has investigated oil as a finite resource that will one day vanish and force the oil-dependent countries to search for economic diversification of their income resources. The argument of this study is that stock market returns in the Gulf Co-operation Council (GCC) countries are affected by volatility in both regional stock markets and oil prices, while economic growth is affected by oil price volatility, with oil prices the main determinants of growth in the GCC countries. This study will examine the volatility and shock transmission mechanisms between the equity markets of the GCC countries and crude oil prices on the one hand, and between crude oil prices and GDP on the other. A multivariate generalised autoregressive conditional heteroscedasticity (MGARCH) Baba, Engle, Kraft and Kroner (BEKK) model and a vector auto-regression (VAR) model will be used to identify the source and magnitude of the volatility and volatility spillovers. This will then be compared to the estimation results from three different groups-the GCC stock market returns, GDPs and oil prices-over the periods 21 September 2005 to 12 February 2010 and 1987 to 2011. The most important findings indicate that persistent volatility in the emerging markets of the GCC countries is largely derived from domestic markets. Oil returns predicted the Saudi Arabian stock market, but could not be predicted by any of the GCC stock markets. The response of stock market returns to shocks generated by oil was large in all markets, and created a memory during the periods studied. Oil prices were found to play a major role in the forecast of error in the variance of the GDPs of GCC countries. Finally, a shock originating from oil prices had a major and persistent impact on the GDPs of all GCC countries, with Kuwait showing the greatest response.

Date of Award	2013
Original language	English