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DO OIL PRICE SHOCK, AND OTHER MACROECONOMIC VARIABLES AFFECT THE STOCK MARKET: A STUDY OF THE SAUDI STOCK MARKET
Corresponding Author(s) : Naushad Alam
Humanities & Social Sciences Reviews,
Vol. 8 No. 3 (2020): May
Abstract
Purpose of the study: This work aims to find the type of relationship amongst the chosen variables, inflation (INF), short-term interest rate (SIR), money supply (M.S.) and crude oil price (COP) and oil price shocks represented by DUMMY respectively on the capital market of Saudi Arabia. It will also throw insight to policymaker to find factors which influence the capital market of Saudi Arabia and to take remedial measures to boost investment in the country.
Research Methodology: The relationships amongst the Saudi security market, the oil price shock, and the selected macroeconomic variables as mentioned above are determined using the Johansen test of co-integration, the vector error correction model, and the Wald test. The research employs the time series data for a period of 2009to 2016, for the study.
Findings: The results show a long-run equilibrium relationship between the Saudi stock market and the selected variables for the study. The study shows a positive association between the money supply and the stock market, but inflation, short-term interest rate, and crude oil price, the result indicates a negative relationship.
Implications: The present study can have implications for the policymaker to take corrective measures for better performance of the stock market by controlling inflation and regulating the short-term interest rate.As the findings indicate that they have a negative relationship with TASI. This paper will also help the policymaker in identifying the real cause for the decline in the value of the stock price. A good performing stock market means better economic growth and overall economic development. To diversify the economy to have an alternative to the oil-driven economy to a more balanced economy by promoting other sectors like manufacturing and tourism.
Novelty/Originality of this study: The literature review confirms that all work of oil price shock is related to its effect on the security market return. This work is different from the other study as it includes macroeconomic variables in the study, together with the oil price shocks. The study is unique from other studies as it is broader in approach, by including more variables than earlier studies which mostly included the oil price shocks and its impact on the stock market. There is no work done to investigate the joint effect of macroeconomic variables and oil price shocks on the Saudi stock market.
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- Adaramola, A. O. (2012). Oil Price Shocks and Stock Market Behaviour: The Nigerian Experience. Journal of Economics, 3(1), 19-24. https://doi.org/10.1080/09765239.2012.11884948 DOI: https://doi.org/10.1080/09765239.2012.11884948
- Alam, M. M., & Uddin,M. G. (2009). Relationship between Interest Rate and Stock Price:Empirical Evidence from Developed and Developing Countries. International Journal of Business and Management, 4(3), 43-51. https://doi.org/10.5539/ijbm.v4n3p43 DOI: https://doi.org/10.5539/ijbm.v4n3p43
- Alam, N. (2017). Analysis of the impact of select macroeconomic variables on the Indian stock market: A heteroscedastic co-integration approach. Business and Economic Horizons, 13(1), 119-127. https://doi.org/10.15208/beh.2017.09 DOI: https://doi.org/10.15208/beh.2017.09
- Almohaimeed, A., & Harrathi, N. (2013). Volatility Transmission and Conditional Correlation between Oil Prices, Stock Market, and Sector Indexes: Empirics for Saudi Stock Market. Journal of Applied Finance & Banking, vol. 3(4), 125-141.https://www.scienpress.com/journal_focus.asp?main_id=56&Sub_id=IV&Issue=737
- Angelidis, T., Degiannakis, S., & Filis, G. (2015). U.S. stock market regimes and oil price shocks. Global Finance Journal, vol.28(C), 132-146. https://doi.org/10.1016/j.gfj.2015.01.006 DOI: https://doi.org/10.1016/j.gfj.2015.01.006
- Arouri, M. E., & Rault, C. (2012). Oil Prices and a stock market in GCC Countries:Empirical evidencefrom panel analysis. International Journal of Finance and Economics, 17(3), 242-253. https://doi.org/10.1002/ijfe.443 DOI: https://doi.org/10.1002/ijfe.443
- Babatunde, M. A., Adenikinju, O., & Adenikinju, A. F. (2013). Oil price shocks and stock market behavior in Nigeria. Journal of Economic Studies, 40(2), 180-202. https://doi.org/10.1108/01443581311283664 DOI: https://doi.org/10.1108/01443581311283664
- Cong, R. G., Wei, Y. M., jiao, J. L., & Fan, Y. (2008). Relationships between oil price shocks and stock market: An empirical analysis from China. Energy Policy, 36(9), 3544-3553. https://doi.org/10.1016/j.enpol.2008.06.006 DOI: https://doi.org/10.1016/j.enpol.2008.06.006
- Fama, E. F. (1981). Stock Returns, Real Activity, Inflation, and Money. The American Economic Review, 71(4), 545-565. Retrieved from https://www.jstor.org/stable/1806180
- Fayyad, A., & Daly, K. (2011). The impact of oil price shocks on stock market returns:Comparing GCC countries with the U.K. and USA. Emerging Markets Review, 12(1), 61-78. https://doi.org/10.1016/j.ememar.2010.12.001 DOI: https://doi.org/10.1016/j.ememar.2010.12.001
- Filis, G., Degiannakis, S., & Floros, C. (2011). Dynamic correlation between the stock market and oil prices: The case of oil-importing and oil-exporting countries. International Review of Financial Analysis, 20(3), 152-164. https://doi.org/10.1016/j.irfa.2011.02.014 DOI: https://doi.org/10.1016/j.irfa.2011.02.014
- French, K. R., Schwert, G. W., & Stambaugh, R. F. (1987). Expected stock returns and volatility. Journal of Financial Economics, 19(1), 3-29. https://doi.org/10.1016/0304-405X(87)90026-2 DOI: https://doi.org/10.1016/0304-405X(87)90026-2
- Hosseini, S. M., Ahmad, Z., & Lai, Y. W. (2011). The Role of Macroeconomic Variables on Stock Market Index in China and India. International Journal of Economics and Finance, 3(6), 233-243. https://doi.org/10.5539/ijef.v3n6p233 DOI: https://doi.org/10.5539/ijef.v3n6p233
- Bera, A. K., & Jarque, C. M. (1981). Efficient Tests for Normality, Homoscedasticity, and Serial Independence of Regression Residuals: Monte Carlo Evidence. Economics Letters, 7(4), 313-318. https://doi.org/10.1016/0165-1765(81)90035-5 DOI: https://doi.org/10.1016/0165-1765(81)90035-5
- Johansen, S. (1991). Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models. Econometrica, 59(6), 1551-1580. https://doi.org/10.2307/2938278 DOI: https://doi.org/10.2307/2938278
- Johansen, S., & Juselius, K. (1990). Maximum Likelihood Estimation and inference on Cointegration with application to the Demand for Money. Oxford Bulletin of Economics and Statistics, 52(2), 169-210. doi: https://doi.org/10.1111/j.1468-0084.1990.mp52002003.x DOI: https://doi.org/10.1111/j.1468-0084.1990.mp52002003.x
- Jones, C.M, Kaul,G. (1996). Oil and the stock markets. Journal of Finance, 51(2), 463-491. https://doi.org/10.2307/2329368 DOI: https://doi.org/10.2307/2329368
- Jouini, J. (2013). Return and volatility interaction between oil prices and stock markets in Saudi Arabia. Journal of Policy Modeling, 35(6), 1124–1144. https://doi.org/10.1016/j.jpolmod.2013.08.003 DOI: https://doi.org/10.1016/j.jpolmod.2013.08.003
- Jung, H., & Park, C. (2011). Stock market reaction to oil price shocks: A comparison between an oil-exporting economy and an oil-importing economy. Journal of Economic Theory and Econometrics, 22(3), 1-29.
- Lee, C. C., & Zeng, J. H. (2011). The impact of oil price shocks on stock market activities:Asymmetric effect with quantile regression. Mathematics and Computers in Simulation, 81(9), 1910-1920. ttps://doi.org/10.1016/j.matcom.2011.03.004 DOI: https://doi.org/10.1016/j.matcom.2011.03.004
- Lin, C. C., Fang, C. R., & Cheng, H. P. (2010). Relationships between oil price shocks and stock market: an empirical analysis from Greater China. China Economic Journal, 3(3), 241-254. https://doi.org/10.1080/17538963.2010.562031 DOI: https://doi.org/10.1080/17538963.2010.562031
- Maysami, R. C., Howe, L. C., & Rahmat, M. A. (2005). Relationship between Macroeconomic Variables and Stock Market Indices: Cointegration Evidence from the Stock Exchange of Singapore's All-S Sector Indices. Jurnal Pengurusan, 24, 47-77. https://doi.org/10.17576/pengurusan-2005-24-03 DOI: https://doi.org/10.17576/pengurusan-2005-24-03
- Merikas, A. G., & Merika, A. A. (2006). Stock prices response to real economic variables: the case of Germany. Managerial Finance, 32(5), 446-450. https://doi.org/10.1108/03074350610657454 DOI: https://doi.org/10.1108/03074350610657454
- Mohanty, S. K., Nandha, M., Turkistani, A. Q., & Alaitani, M. Y. (2011). Oil price movements and stock market return: Evidence from the Gulf Cooperation Council (GCC) countries. Global Finance Journal, 22(1), 42-55. https://doi.org/10.1016/j.gfj.2011.05.004 DOI: https://doi.org/10.1016/j.gfj.2011.05.004
- Mukherje, T. K., & Naka, A. (1995). Dynamic relations between Macroeconomic Variables and the Japanese Stock Market: An application of a Vector Error Correction Model. The Journal of Financial Research, 18(2), 223-237. https://doi.org/10.1111/j.1475-6803.1995.tb00563.x DOI: https://doi.org/10.1111/j.1475-6803.1995.tb00563.x
- Naifar, N., & Al Dohaiman, M. S. (2013). Nonlinear analysis among crude oil prices, stock markets' returns, and macroeconomic variables. International Review of Economics and Finance, 27, 416-431. https://doi.org/10.1016/j.iref.2013.01.001 DOI: https://doi.org/10.1016/j.iref.2013.01.001
- Naik, P. K. (2013). Does the Stock Market Respond to Economic Fundamentals?Timeseries Analysis from Indian Data. Journal of Applied Economics and Business Research, 3(1), 34-50.
- Park, J., & Ratti, R. A. (2008). Oil price shocks and stock markets in the U.S. and 13 European countries. Energy Economics, 30(5), 2587-2608. https://doi.org/10.1016/j.eneco.2008.04.003 DOI: https://doi.org/10.1016/j.eneco.2008.04.003
- Ratanapakorn, O., & Sharma, S. C. (2007). Dynamics analysis between the US Stock Return and the Macroeconomics Variables. Applied Financial Economics, 17(5), 369-377. https://doi.org/10.1080/09603100600638944 DOI: https://doi.org/10.1080/09603100600638944
- Sadorsky, P. (1999). Oil price shocks and stock market activity. Energy Economics, 21(5), 449-469. https://doi.org/10.1016/S0140-9883(99)00020-1 DOI: https://doi.org/10.1016/S0140-9883(99)00020-1
- Shahrestani, P., & Rafei, M. (2020). The impact of oil price shocks on the Tehran Stock Exchange returnsthe Application of the Markov switching vector autoregressive models. Resources Policy, 65, 1-9. https://doi.org/10.1016/j.resourpol.2020.101579 DOI: https://doi.org/10.1016/j.resourpol.2020.101579
- Tchatoka, F. D., Masson, V., & Parry, S. (2019). Linkages between oil price shocks and stock return revisited. Energy Economics, 82, 42-61. https://doi.org/10.1016/j.eneco.2018.02.016 DOI: https://doi.org/10.1016/j.eneco.2018.02.016
- Tripathy, N. (2011). Causal Relationship between Macro-Economic Indicators and Stock Market in India. Asian Journal of Finance and Economics, 3(1), 208-226. https://doi.org/10.5296/ajfa.v3i1.633 DOI: https://doi.org/10.5296/ajfa.v3i1.633
- Tsoukalas, D. (2003). Macroeconomic Factors and Stock Prices in the Emerging Cypriot Equity Market. Managerial Finance, 29(4), 87-92. https://doi.org/10.1108/03074350310768300 DOI: https://doi.org/10.1108/03074350310768300
References
Adaramola, A. O. (2012). Oil Price Shocks and Stock Market Behaviour: The Nigerian Experience. Journal of Economics, 3(1), 19-24. https://doi.org/10.1080/09765239.2012.11884948 DOI: https://doi.org/10.1080/09765239.2012.11884948
Alam, M. M., & Uddin,M. G. (2009). Relationship between Interest Rate and Stock Price:Empirical Evidence from Developed and Developing Countries. International Journal of Business and Management, 4(3), 43-51. https://doi.org/10.5539/ijbm.v4n3p43 DOI: https://doi.org/10.5539/ijbm.v4n3p43
Alam, N. (2017). Analysis of the impact of select macroeconomic variables on the Indian stock market: A heteroscedastic co-integration approach. Business and Economic Horizons, 13(1), 119-127. https://doi.org/10.15208/beh.2017.09 DOI: https://doi.org/10.15208/beh.2017.09
Almohaimeed, A., & Harrathi, N. (2013). Volatility Transmission and Conditional Correlation between Oil Prices, Stock Market, and Sector Indexes: Empirics for Saudi Stock Market. Journal of Applied Finance & Banking, vol. 3(4), 125-141.https://www.scienpress.com/journal_focus.asp?main_id=56&Sub_id=IV&Issue=737
Angelidis, T., Degiannakis, S., & Filis, G. (2015). U.S. stock market regimes and oil price shocks. Global Finance Journal, vol.28(C), 132-146. https://doi.org/10.1016/j.gfj.2015.01.006 DOI: https://doi.org/10.1016/j.gfj.2015.01.006
Arouri, M. E., & Rault, C. (2012). Oil Prices and a stock market in GCC Countries:Empirical evidencefrom panel analysis. International Journal of Finance and Economics, 17(3), 242-253. https://doi.org/10.1002/ijfe.443 DOI: https://doi.org/10.1002/ijfe.443
Babatunde, M. A., Adenikinju, O., & Adenikinju, A. F. (2013). Oil price shocks and stock market behavior in Nigeria. Journal of Economic Studies, 40(2), 180-202. https://doi.org/10.1108/01443581311283664 DOI: https://doi.org/10.1108/01443581311283664
Cong, R. G., Wei, Y. M., jiao, J. L., & Fan, Y. (2008). Relationships between oil price shocks and stock market: An empirical analysis from China. Energy Policy, 36(9), 3544-3553. https://doi.org/10.1016/j.enpol.2008.06.006 DOI: https://doi.org/10.1016/j.enpol.2008.06.006
Fama, E. F. (1981). Stock Returns, Real Activity, Inflation, and Money. The American Economic Review, 71(4), 545-565. Retrieved from https://www.jstor.org/stable/1806180
Fayyad, A., & Daly, K. (2011). The impact of oil price shocks on stock market returns:Comparing GCC countries with the U.K. and USA. Emerging Markets Review, 12(1), 61-78. https://doi.org/10.1016/j.ememar.2010.12.001 DOI: https://doi.org/10.1016/j.ememar.2010.12.001
Filis, G., Degiannakis, S., & Floros, C. (2011). Dynamic correlation between the stock market and oil prices: The case of oil-importing and oil-exporting countries. International Review of Financial Analysis, 20(3), 152-164. https://doi.org/10.1016/j.irfa.2011.02.014 DOI: https://doi.org/10.1016/j.irfa.2011.02.014
French, K. R., Schwert, G. W., & Stambaugh, R. F. (1987). Expected stock returns and volatility. Journal of Financial Economics, 19(1), 3-29. https://doi.org/10.1016/0304-405X(87)90026-2 DOI: https://doi.org/10.1016/0304-405X(87)90026-2
Hosseini, S. M., Ahmad, Z., & Lai, Y. W. (2011). The Role of Macroeconomic Variables on Stock Market Index in China and India. International Journal of Economics and Finance, 3(6), 233-243. https://doi.org/10.5539/ijef.v3n6p233 DOI: https://doi.org/10.5539/ijef.v3n6p233
Bera, A. K., & Jarque, C. M. (1981). Efficient Tests for Normality, Homoscedasticity, and Serial Independence of Regression Residuals: Monte Carlo Evidence. Economics Letters, 7(4), 313-318. https://doi.org/10.1016/0165-1765(81)90035-5 DOI: https://doi.org/10.1016/0165-1765(81)90035-5
Johansen, S. (1991). Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models. Econometrica, 59(6), 1551-1580. https://doi.org/10.2307/2938278 DOI: https://doi.org/10.2307/2938278
Johansen, S., & Juselius, K. (1990). Maximum Likelihood Estimation and inference on Cointegration with application to the Demand for Money. Oxford Bulletin of Economics and Statistics, 52(2), 169-210. doi: https://doi.org/10.1111/j.1468-0084.1990.mp52002003.x DOI: https://doi.org/10.1111/j.1468-0084.1990.mp52002003.x
Jones, C.M, Kaul,G. (1996). Oil and the stock markets. Journal of Finance, 51(2), 463-491. https://doi.org/10.2307/2329368 DOI: https://doi.org/10.2307/2329368
Jouini, J. (2013). Return and volatility interaction between oil prices and stock markets in Saudi Arabia. Journal of Policy Modeling, 35(6), 1124–1144. https://doi.org/10.1016/j.jpolmod.2013.08.003 DOI: https://doi.org/10.1016/j.jpolmod.2013.08.003
Jung, H., & Park, C. (2011). Stock market reaction to oil price shocks: A comparison between an oil-exporting economy and an oil-importing economy. Journal of Economic Theory and Econometrics, 22(3), 1-29.
Lee, C. C., & Zeng, J. H. (2011). The impact of oil price shocks on stock market activities:Asymmetric effect with quantile regression. Mathematics and Computers in Simulation, 81(9), 1910-1920. ttps://doi.org/10.1016/j.matcom.2011.03.004 DOI: https://doi.org/10.1016/j.matcom.2011.03.004
Lin, C. C., Fang, C. R., & Cheng, H. P. (2010). Relationships between oil price shocks and stock market: an empirical analysis from Greater China. China Economic Journal, 3(3), 241-254. https://doi.org/10.1080/17538963.2010.562031 DOI: https://doi.org/10.1080/17538963.2010.562031
Maysami, R. C., Howe, L. C., & Rahmat, M. A. (2005). Relationship between Macroeconomic Variables and Stock Market Indices: Cointegration Evidence from the Stock Exchange of Singapore's All-S Sector Indices. Jurnal Pengurusan, 24, 47-77. https://doi.org/10.17576/pengurusan-2005-24-03 DOI: https://doi.org/10.17576/pengurusan-2005-24-03
Merikas, A. G., & Merika, A. A. (2006). Stock prices response to real economic variables: the case of Germany. Managerial Finance, 32(5), 446-450. https://doi.org/10.1108/03074350610657454 DOI: https://doi.org/10.1108/03074350610657454
Mohanty, S. K., Nandha, M., Turkistani, A. Q., & Alaitani, M. Y. (2011). Oil price movements and stock market return: Evidence from the Gulf Cooperation Council (GCC) countries. Global Finance Journal, 22(1), 42-55. https://doi.org/10.1016/j.gfj.2011.05.004 DOI: https://doi.org/10.1016/j.gfj.2011.05.004
Mukherje, T. K., & Naka, A. (1995). Dynamic relations between Macroeconomic Variables and the Japanese Stock Market: An application of a Vector Error Correction Model. The Journal of Financial Research, 18(2), 223-237. https://doi.org/10.1111/j.1475-6803.1995.tb00563.x DOI: https://doi.org/10.1111/j.1475-6803.1995.tb00563.x
Naifar, N., & Al Dohaiman, M. S. (2013). Nonlinear analysis among crude oil prices, stock markets' returns, and macroeconomic variables. International Review of Economics and Finance, 27, 416-431. https://doi.org/10.1016/j.iref.2013.01.001 DOI: https://doi.org/10.1016/j.iref.2013.01.001
Naik, P. K. (2013). Does the Stock Market Respond to Economic Fundamentals?Timeseries Analysis from Indian Data. Journal of Applied Economics and Business Research, 3(1), 34-50.
Park, J., & Ratti, R. A. (2008). Oil price shocks and stock markets in the U.S. and 13 European countries. Energy Economics, 30(5), 2587-2608. https://doi.org/10.1016/j.eneco.2008.04.003 DOI: https://doi.org/10.1016/j.eneco.2008.04.003
Ratanapakorn, O., & Sharma, S. C. (2007). Dynamics analysis between the US Stock Return and the Macroeconomics Variables. Applied Financial Economics, 17(5), 369-377. https://doi.org/10.1080/09603100600638944 DOI: https://doi.org/10.1080/09603100600638944
Sadorsky, P. (1999). Oil price shocks and stock market activity. Energy Economics, 21(5), 449-469. https://doi.org/10.1016/S0140-9883(99)00020-1 DOI: https://doi.org/10.1016/S0140-9883(99)00020-1
Shahrestani, P., & Rafei, M. (2020). The impact of oil price shocks on the Tehran Stock Exchange returnsthe Application of the Markov switching vector autoregressive models. Resources Policy, 65, 1-9. https://doi.org/10.1016/j.resourpol.2020.101579 DOI: https://doi.org/10.1016/j.resourpol.2020.101579
Tchatoka, F. D., Masson, V., & Parry, S. (2019). Linkages between oil price shocks and stock return revisited. Energy Economics, 82, 42-61. https://doi.org/10.1016/j.eneco.2018.02.016 DOI: https://doi.org/10.1016/j.eneco.2018.02.016
Tripathy, N. (2011). Causal Relationship between Macro-Economic Indicators and Stock Market in India. Asian Journal of Finance and Economics, 3(1), 208-226. https://doi.org/10.5296/ajfa.v3i1.633 DOI: https://doi.org/10.5296/ajfa.v3i1.633
Tsoukalas, D. (2003). Macroeconomic Factors and Stock Prices in the Emerging Cypriot Equity Market. Managerial Finance, 29(4), 87-92. https://doi.org/10.1108/03074350310768300 DOI: https://doi.org/10.1108/03074350310768300