The links between crude oil prices and GCC stock markets: Evidence from time-varying Granger causality tests

This paper investigates the impact of crude oil price movements on the stock markets of Gulf Corporation Council (GCC) countries using weekly data for the period of February 2, 1994-February 26, 2010. The causal link between oil and stock markets are modeled using a Markov switching vector autoregressive (MS-VAR) model in order to reflect changes in Granger causality over time. The MS-VAR model allows testing for both conditional Granger causality and regime predicting causality. The parameter instability tests indicate that causal links between crude oil prices and stock market indexes are highly time-varying. The full sample conditional Granger causality tests based on the MS-VAR model, which identifies four regimes each corresponding to causal relationships, rejects both the causal impact of lagged stock market prices on oil prices and the causal impact from crude oil spot prices to stock market indexes in the full sample. However, regime prediction causality from oil prices to GCC stock markets is not rejected for all countries we consider, indicating that oil prices have predictive content for the regime of GCC stock markets. These results encompass the previous findings and offer new insights into the nature of causal relationships between oil price and stock markets in GCC countries.