Linking crude oil prices and Middle East stock markets

• Date: 01 June 2019
• Author: Mousa Tawfeeq,Alan R. Collins,Gulnara Zaynutdinova,Levan Elbakidze
• Published date: 01 June 2019
• DOI: http://doi.org/10.1111/opec.12145

Linking crude oil prices and Middle East

stock markets

Mousa Tawfeeq*, Alan R. Collins**, Levan Elbakidze*** and Gulnara

Zaynutdinova****

*Department of Economics, College of Administration and Economics, Salahadin University-Erbil, Kurdistan,

Iraq. Applied Economics, Davis College of Agriculture Natural Resources & Design, West Virginia University,

4307Agricultural ScienceBuilding, Morgantown,PO BOX6108 WV, USA. Email: mmtawfeeq@mix.wvu.edu,

musatawfeeq@gmail.com

**Division of Resource Economics and Management, Davis College of Agriculture Natural Resources &

Design, West Virginia University, 4212 Agricultural Science Building, Morgantown, PO BOX 6108 WV,

USA. Email: alan.collins@mail.wvu.edu

***Resource Economics and Management, Center for Innovation in Gas Research and Utilization, West

Virginia University, 1306 Evansdale Drive, Morgantown, PO BOX 6102 WV, USA. Email:

levan.elbakidze@mail.wvu.edu

****Department of Finance, John Chambers College of Business and Economics, West Virginia University,

1601 University Ave, Morgantown, PO BOX 6025 WV, USA. Email: Gulnara.Zaynutdinova@mail.wvu.edu

Abstract

This study investigates the effects of oil prices (OPs) on stock markets in the Middle Eastern

(ME) economies. The focus is on the dynamic relationship between crude OPs and stock

market capitalisation (MC) in the ME. We use daily data from nine countries between the

years 2001 and 2015 to examine the relationships based on Vector Autoregression (VAR),

Vector Error Correction Model (VECM) and Impulse Response Function (IRF). VECM results

indicate that there are long-run linkages between OP and MC in seven ME economies from

2001 to 2015, three countries in the pre-shale (2001–2008) and four countries in the post-shale

(2009–2015) periods. The VAR models show short-run causality running from OP to MC in

two countries from 2001 to 2015, five countries in pre-shale and six countries in post-shale

periods. The IRFs verify the relationships between OPs and stock market value for most of the

ME markets.

JEL classification: R53, Q49, P22, N22.

[Correction added on 11 July 2019, after first online publication: The list of authors was previously

incorrect and has been updated in this current version. Changes have been made in this article to

improve readability.]

©2019 Organization of the Petroleum Exporting Countries. Published by John Wiley & Sons Ltd, 9600 Garsington

Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.

136

1. Introduction

Due to the vital role of crude oil in the global economy, the literature on the effects of

changes in crude oil price (OP) on world economies and financial markets is rich. Many

studies have found statistically significant impacts of crude OP on economic growth and

stock market indicators (Jones and Kaul, 1996; Sadorsky, 1999; Park and Ratti, 2008;

Apergis and Miller, 2009; Kilian and Park, 2009; Narayan and Sharma, 2011; Scholtens

and Yurtsever, 2012). Fewer studies have focused on the impact of crude OP changes on

Middle East (ME) stock markets. Moreover, there is no research that links crude OPs and

stock market capitalisation (MC) in the ME economies. Findings from previous resear ch

indicate that crude OP changes have a significant impact on the market performance

(Jones et al., 2004; Basher and Sadorsky, 2006; Miller and Ratti, 2009; Filis et al., 2011;

Arouri and Roult, 2012; Le and Chang, 2015; Ewing and Malik, 2016). Ghalayini (2011)

emphasizes that crude OP is essential for the ME economies.

Previous empirical studies on crude OP and stock market performance use stock

returns or stock market indices. (Jones and Kaul, 1996; Narayan and Sharma, 2011; Lee

et al., 2012; Sadorsky, 1999; Park and Ratti, 2008; Scholtens and Yurtsever, 2012; Park

and Ratti, 2008; Apergis and Miller, 2009; Kilian and Park, 2009). While stock market

indices are useful, they provide a only partial representation of overall market

performance. For instance, the TA-35 index in Israel is a price-weighted index where

higher priced stocks have a larger impact on the movements of the index as compared to

lower priced stocks. On the other hand, stock market capitalisation (MC) provides a

more aggregate measure of market performance. In this view, MC is a macroeconomic

indicator which can be informative for policymakers and investors in terms of analyzing

market trends and formulating economic policy.

The ME stock markets have been affected by crude OP changes before and after

global financial crisis. The ME countries experienced strong economic growth during

2000–2008 as a result of higher OPs (Selvik and Stenslie, 2011). In November

2007, prices of WTI’s OP and the Brent’s OP went beyond $90 per barrel and

reached the record peak of US$ 145 per barrel in July 2008. Since then the prices

have declined significantly. The fluctuations in the OP can be expected to have

affected ME stock markets because many of the ME economies represent the

majority of oil production and trade. Policymakers in ME countries which heavily

rely on oil industry must not only take into consideration how their decisions affect

energy markets, but also consider the impact of OP shocks on their stock markets.

Hence, this empirical study investigates a dynamic linkage between OP and MC in

the ME stock markets.

In this context, the objective of this study is to examine the impact of changes in

crude OPs on MC in the stock markets of nine ME economies including oil-exporting

©2019 Organization of the Petroleum Exporting Countries OPEC Energy Review June 2019

Oil prices and Middle East stock markets 137

and oil-importing economies (United Arab Emirates, Bahrain, Egypt, Israel, Jordan,

Kuwait, Qatar, Saudi Arabia and Turkey). In this paper, the principal focus is on the

examination of the dynamic long-run linkages between stock MC and OP across nine

ME economies from 2001 to 2015 using a Vector Autoregressive Regression (VAR)

and Vector Error Correction Model (VECM). This study offers the following

contributions to the literature: (i) we explore the relationship between OP and stock

MC in the ME region including oil importing as well as exporting countries; (ii) As an

aggregate measure of market performance we use daily stock MC which combines all

listed companies in each country.

Our findings include four general results: First, the Johansen’s test in the period

2001–2008 shows that there is cointegration between OP and MC in Bahrain, Kuwait,

Saudi Arabia and Turkey and no cointegration in the remaining five economies. During

the 2009–2015, there is cointegration between OP and MC in United Arab Emirates,

Israel, Jordan and Qatar and no cointegrtaion in the other five economies. In 2001–2015,

the results show cointegration relationship among the OP and MC variables in seven of

nine countries (Egypt and Jordan are exceptions). The linkages between OP and MC

imply some degree of predictability, dependency on OPs and association between stock

market values and crude oil in the ME region.

Second, the results from VECM indicate that stock markets of all oil-exporting

countries have long-run dependence on OPs. Third, the evidence of VAR shows that an

increase in OP is associated with a significant increase in the short-run MC in all

economies except Israel, Jordan and Egypt. This result illustrates that oil-exporting

countries are more likely to depend on OP in short- and long-run periods.

Finally, the IRFs confirm the positive relationships between OP and MC for the

majority of ME stock markets. These findings illustrate the significance of OP for ME

economies. Hence, OP should be considered by policymakers as well as investors who

are active in ME markets.

The remainder of this paper is organised as follows. Section 2 surveys relevant

literature on OP and MC. Section 3 provides a theoretical framework for this research.

Section 4 is presents the empirical models. The next section describes data and presents

descriptive statistics. Section 6 presents the results. Section 7 provides concluding

remarks.

2. Literature review

Oil prices and stock markets have been extensively studied in the economic and

financial literature especially during the past decade (Jones et al., 2004; Basher and

Sadorsky, 2006; Maghyereh, 2006; Lardic and Mignon, 2008; Yu and Hassan, 2008;

Miller and Ratti, 2009; Filis et al., 2011; Arouri and Roult, 2012; Le and Chang, 2015;

OPEC Energy Review June 2019 ©2019 Organization of the Petroleum Exporting Countries

138 Mousa Tawfeeq, Alan R. Collins, Levan Elbakidze and Gulnara Zaynutdinova