Albahooth, Bayan (2020) Interdependence of oil prices and global factors affecting the stock market performance: a sectoral analysis of GCC countries. PhD thesis, Victoria University.

Abstract

Gulf Cooperation Council (GCC) countries are the major world suppliers of petroleum and petroleum products. Therefore, their stock markets are likely more vulnerable to changes in petroleum product prices. Moreover, the volatility of GCC stock markets is also influenced by other important global factors, such as the Morgan Stanley Capital International (MSCI) World index; as well as movements in international financial markets, particularly the United States (US) S&P 500 index. This thesis aims to investigate the independent relationship between oil prices and other global factors— including MSCI and US S&P 500 indices—among three major GCC stock market sectors (consumer discretionary, financial and real estate) in the period 2010–17 in which a major oil price decline directly affected the growth of GCC financial markets as GCC countries held 30% of the world’s proven oil reserves. The objective of the research is to identify to what extent oil prices along with other global factors affect GCC stock market volatility at the sectoral level. Studying the volatility transmission behaviours of GCC stock markets at the sectoral level gives a better understating of the volatile behaviour of GCC equity markets. It also eliminates the masking of individual sector reactions that may result in the case of studying stock markets as a single block. This research adopts various advanced econometrics quantitative methods to test hypotheses regarding the nature of volatility transmission behaviours involving GCC stock markets and a set of global factors, by using daily stock return of the selected variables under study. The methods applied include an exponential generalised autoregressive conditional heteroscedastic (EGARCH) model, vector autoregressive (VAR) model, Granger causality model, cross-correlation function (CCF) and multivariate GARCH- BEKK model. These models provide a comprehensive and in-depth view of how various selected sectors in GCC equity markets respond to volatility transmission with a set of the most influential global factors. The key research findings on volatility transmission effects between GCC stock markets and three global factors (West Texas Intermediate [WTI] oil price, MSCI and US S&P 500 index) suggest that the WTI oil price has a major influence on various selected sectors of GCC stock markets, while the MSCI and S&P 500 indices show less of an impact on the GCC sectors under study. The analysis findings are then used to obtain optimal weights and hedge ratios for building optimal, diversified portfolios that contain both oil and non-oil assets in the equity markets under study. Using advanced analysis techniques, this research aims to derive practical, in-depth implications for both GCC stock market investors and government policy makers about volatility patterns for oil prices and global factors that affect GCC stock markets.

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