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Investigating Stock Price Dynamics in an Oil-Dependent Economy: The Case of Kuwait

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  • Arifa, Ali

    (Kuwait University, Kuwait)

  • Ghali, Khalifa H.

    (Kuwait University, Kuwait)

  • Limam, Imed

    (The Arab Planning Institute, Kuwait)

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    Abstract

    The recent literature on stock markets has used modern time series techniques such as cointegration and causality to identify macroeconomic variables that cause stock index movements. But this type of investigation has to a large extent remained confined to markets belonging to well developed and diversified economies. Motivated by the lack of set-ups involving stock markets from economies with different profiles, this paper concentrates on the Kuwaiti stock market whose unique features as an oil-dependent economy render its investigation a useful exercise. Based on multivariate time-series techniques and using monthly data spanning the period September 1992 to December 1998, the investigation reveals three important factors that are believed to have long-term equilibrium effects on stock market prices in Kuwait. Oil prices, U.S. interest rates and real estate prices are found to form a cointegrating relationship with stock prices. The results in this paper indicate clearly a sharp contrast in terms of stock market dynamics between an oil-dependent economy like Kuwait’s and those of highly diversified economies. It is argued that the reported results are nevertheless logical in light of the unique features of the oil-dependent Kuwaiti economy.

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    Bibliographic Info

    Article provided by Queensland University of Technology (QUT), School of Economics and Finance in its journal Economic Analysis and Policy (EAP).

    Volume (Year): 32 (2002)
    Issue (Month): 2 (June Special Issue)
    Pages: 141-158

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    Handle: RePEc:eap:articl:v:32:y:2002:i:2:p:141-158

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    1. Johansen, Soren, 1992. "Determination of Cointegration Rank in the Presence of a Linear Trend," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 383-97, August.
    2. Zapata, Hector O & Rambaldi, Alicia N, 1997. "Monte Carlo Evidence on Cointegration and Causation," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 59(2), pages 285-98, May.
    3. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    4. Granger, C. W. J., 1988. "Some recent development in a concept of causality," Journal of Econometrics, Elsevier, vol. 39(1-2), pages 199-211.
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    6. Fama, Eugene F, 1981. "Stock Returns, Real Activity, Inflation, and Money," American Economic Review, American Economic Association, vol. 71(4), pages 545-65, September.
    7. Judith A. Giles & Sadaf Mirza, 1999. "Some Pretesting Issues on Testing for Granger Noncausality," Econometrics Working Papers 9914, Department of Economics, University of Victoria.
    8. Toda, Hiro Y. & Yamamoto, Taku, 1995. "Statistical inference in vector autoregressions with possibly integrated processes," Journal of Econometrics, Elsevier, vol. 66(1-2), pages 225-250.
    9. Granger, Clive W J, 1986. "Developments in the Study of Cointegrated Economic Variables," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 213-28, August.
    10. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
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