Oil price shocks and GCC capital markets: who drives whom?

Global reliance on Hydrocarbon sector has dramatically increased multi-fold which has led to rise to dominance of GCC. GCC is home to 45% of the proven oil reserves and contributes nearly 35% of the world oil exports annually. With such heavy reliance of the world on GCC for its oil produce, and the GCC’s economic reliance on Oil and Gas exports, the matter of world oil price shocks and its transmission to other areas of economy is of immense importance to the GCC economies. With Oil wealth accumulating in GCC with some estimates of over $500 billion, oil shocks and stock market volatility in GCC has emerged as a key concern area. Our paper focuses on understanding the short term and long term correlation between oil price shocks and GCC stock market’s volatility and the presence of any lead lag relationships. This study provides unique findings, different from earlier studies as we are able to analyze with non-linearity and least restrictive assumptions. The findings of this study are paramount for portfolio managers for their diversification benefit as well as timing of investment and divestment purposes.