Mohamed El Hedi Arouri

Oil Prices and Stock Markets: What Drives What in the Gulf Corporation Council Countries

In the empirical literature, only few studies have focused on the relationship between oil prices and stock markets in net oil-importing countries. In net oil-exporting countries this relationship has not been widely researched. This paper implements the panel-data approach of Konya (2006), which is based on SUR systems and Wald tests with country-specific bootstrap critical values to study the sensitivity of stock markets to oil prices in GCC (Gulf Corporation Council) countries. Using two different (weekly and monthly) datasets covering respectively the periods from 7 June 2005 to 21 October 2008, and from January 1996 to December 2007, we show strong statistical evidence that the causal relationship is consistently bi-directional for Saudi Arabia. Stock market price changes in the other GCC member countries do not Granger cause oil price changes, whereas oil price shocks Granger cause stock price changes. Therefore, investors in GCC stock markets should look at the changes in oil prices, whereas investors in oil markets should look at changes in the Saudi stock market.

Time‐varying characteristics of cross‐market linkages with empirical application to Gulf stock markets

Purpose - The purpose of this paper is to propose an empirical procedure for examining the time-varying features of cross-market correlations in selected Gulf stock markets. Design/methodology/approach - The paper directly infers the cross-market linkages from the stock data using a multivariate dynamic conditional correlation GARCH model (DCC-GARCH). The paper attempts to date the structural breaks in the time-paths of the conditional correlation indices to investigate whether the cross-market comovement encompasses significant changes in nature or not. Findings - Conditional cross-market correlations between studied markets are shown to be time-varying, past-dependent and subject to structural breaks. However, the comovements are still small within the Gulf region and insignificant between the Gulf stock markets and the world market. Research limitations/implications - Even though the paper attempted to relate the observed changes in market linkages to major economic and political events that the Gulf region experienced during the sample period, a more careful, in-depth analysis is needed since the primary objectives of this paper consist only of measuring stock market comovements and detecting their possible structure changes. Practical implications - For global investors, there is still room for international and regional diversification in Gulf markets, given the low degree of comovements documented in the study. Originality/value - The application of the DCC-GARCH model and structural change test in a linear framework appears to be suitable for studying the time-varying properties of cross-market linkages between markets in the Gulf region. It also provides information about the degree of financial integration of the studied markets with the world stock market through an analysis of the conditional correlation coefficients.

An international CAPM for partially integrated markets: Theory and empirical evidence

This article proposes a theoretical testable capital asset pricing model for partially segmented markets. We establish that if some investors do not hold all international assets because of direct and/or indirect barriers, the world market portfolio is not efficient and the traditional international CAPM must be augmented by a new factor reflecting the local risk undiversifiable internationally. We also introduce a suitable framework to test this model empirically. Using a sample of six emerging markets and three mature markets, we find that the degree of stock market integration varies through time and that most of the sample emerging markets have become more integrated in the recent years. The local risk premium for emerging markets represents the most important component of the total risk premium, but its relative importance has decreased recently. Differently, the total risk premium for developed countries is largely driven by global factors.

THE COMOVEMENTS IN INTERNATIONAL STOCK MARKETS: NEW EVIDENCE FROM LATIN AMERICAN EMERGING COUNTRIES

We analyse the time variations in the comovements of Latin American stock markets. Conditional correlations are estimated from the dynamic conditional correlation GARCH model. Then, Bai and Perrons (2003) structural break technique is employed to test for changing nature of market comovements. Main findings are as follows. First, the degree of cross-market comovements changed over time and has significantly increased since 1994. However, room for international diversification still remains largely possible. Second, the comovements are subjected to various regime shifts, essentially due to major economic events. Finally, stock markets move much more together in times of crisis.

Global financial crisis, liquidity pressure in stock markets and efficiency of central bank interventions

In this article, we investigate the hypothesis of efficiency of central bank intervention policies within the current global financial crisis. We firstly discuss the major existing interventions of central banks around the world to improve liquidity, restore investor confidence and avoid a global credit crunch. We then evaluate the short-term efficiency of these policies in the context of the UK, the US and the French financial markets using different modelling techniques. On the one hand, the impulse response functions in a Structural Vector Autoregressive (SVAR) model are used to apprehend stock market reactions to central bank policies. On the other hand, since these reactions are likely to be of an asymmetric and nonlinear nature, a two-regime Smooth Transition Regression-Generalized Autoregressive Conditional Heteroscedasticity (STR-GARCH) model is estimated to explore the complexity and nonlinear responses of stock markets to exogenous shifts in monetary policy shocks. As expected, our findings show strong repercussions from interest rate changes on stock markets, indicating that investors keep a close eye on central bank intervention policies to make their trading decisions. The stock markets lead monetary markets, however, when central banks are slow to adjust their benchmark interest rates.

Stock market integration in Mexico and Argentina: are short- and long-term considerations different?

This article aims to study the issue of short- and long-term stock market integration in two of Latin Americas biggest emerging economies – Mexico and Argentina – with the US stock market using multivariate cointegration tools. Our study covers a period of two decades and shows strong evidence of Argentina and Mexicos short-term financial dependence on the US market. However, our results show no long-term linkages between the markets studied, indicating that Mexican and Argentinean stock markets are governed more by their fundamentals in the long term.

Causal relationships between oil and stock prices: some new evidence from gulf oil-exporting countries

Cet article etudie la relation entre le prix du petrole et les marches boursiers dans les pays du Conseil de Cooperation du Golfe (CCG). En utilisant une base de donnees hebdomadaire couvrant la periode allant du 7 juin 2005 au 25 mai 2010, nous mettons en evidence une relation de causalite bidirectionnelle tres significative entre le prix du petrole et le marche boursier en Arabie Saoudite. En revanche, pour les autres pays membres du CCG, nous montrons que les variations du prix du petrole causent au sens de Granger les variations des prix des actions, alors que ces dernieres ne causent pas les variations du prix du petrole. Par consequent, les investisseurs dans les marches boursiers du CCG devraient suivre les evolutions du prix du petrole, alors que les investisseurs dans les marches petroliers devraient etre attentifs aux changements dans le marche boursier saoudien.Classification JEL : G12 ; F3 ; Q43.

Chapter 6 Oil Prices and Exchange Rates: Some New Evidence Using Linear and Nonlinear Models

Purpose – The purpose of this chapter is to investigate the linear and nonlinear short- and long-run relationships between the real price of oil and the US real effective exchange rate. Methodology/approach – We use recent linear and nonlinear econometric techniques over the period 1973–2009. Findings – Our main findings are that (i) there is significant evidence that both variables contain a unit root; (ii) the oil price and the US exchange rate are strongly linked in the short run; and finally (iii) there are some signs of nonlinearity in the oil–exchange rate relationship. Originality – Using recent econometric techniques, we show that exchange rates are not a fundamental determinant of oil prices but exchange rate changes help to better forecast oil prices in the short run.

Cross-market dynamics and optimal portfolio strategies in Latin American equity markets

Purpose – This paper aims to investigate the return links and volatility transmission between five major equity markets of the Latin American region and the USA over the period 1993-2012. Design/methodology/approach – The authors employ a multivariate vector autoregressive moving average – generalized autoregressive conditional heteroskedasticity (VAR-GARCH) methodology which allows for cross-market transmissions in both return and volatility. Moreover, we show how the obtained results can be used to design internationally diversified portfolios involving the Latin American assets and to analyze the effectiveness of hedging strategies. Findings – The results point to the existence of substantial cross-market return and volatility spillovers and are thus crucial for international portfolio management in the Latin American region. However, the intensity of shock and volatility cross effects varies across the studied markets. Research limitations/implications – The optimal weights and hedging ratios that we ...

Co-Movements between Germany and International Stock Markets: Some New Evidence from DCC-GARCH and Wavelet Approaches

The analysis of co-movements of stock market returns is a fundamental issue in finance. The aim of this paper is to examine the co-movement between Germany and major International Stock Markets in the time–frequency space. Our sample period goes from 01 J