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Return and volatility interaction between oil prices and stock markets in Saudi Arabia

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  • Jouini, Jamel

Abstract

The paper aims at investigating the links between world oil price and stock sector markets in Saudi Arabia over the weekly period from January 10, 2007 until September 28, 2011. To that effect, we make use of the VAR-GARCH process developed by Ling and McAleer (2003), which has the advantage to address the issue of return and volatility spillovers among the series we consider. Globally, the empirical findings show evidence of return and volatility transmission between oil price and stock sectors. However, the spillover effects are unidirectional from oil to some sectors for returns, but bidirectional for volatility patterns with more apparent links from sectors to oil. The optimal weights and hedge ratios for oil/stock portfolio holdings are sensitive to the sectors considered, and allow a better understanding of the links between sectors and oil for investors who seek for investment opportunities and want to diversify their portfolios. The findings are of great interest and have important implications for investors, market participants and policy makers.

Suggested Citation

  • Jouini, Jamel, 2013. "Return and volatility interaction between oil prices and stock markets in Saudi Arabia," Journal of Policy Modeling, Elsevier, vol. 35(6), pages 1124-1144.
  • Handle: RePEc:eee:jpolmo:v:35:y:2013:i:6:p:1124-1144
    DOI: 10.1016/j.jpolmod.2013.08.003
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    Cited by:

    1. Pershin, Vitaly & Molero, Juan Carlos & de Gracia, Fernando Perez, 2016. "Exploring the oil prices and exchange rates nexus in some African economies," Journal of Policy Modeling, Elsevier, vol. 38(1), pages 166-180.
    2. repec:eme:ajempp:ajems-03-2017-0047 is not listed on IDEAS
    3. Nazlioglu, Saban & Soytas, Ugur & Gupta, Rangan, 2015. "Oil prices and financial stress: A volatility spillover analysis," Energy Policy, Elsevier, vol. 82(C), pages 278-288.
    4. Yen-Hsien Lee & Ting-Huei Liao & Ya-Ling Huang & Tzu-Ling Huang, 2015. "Dynamic Spillovers between Oil and Stock Markets: New Approaches at Spillover Index," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 6(2), pages 178-189, April.
    5. Jiranyakul, Komain, 2014. "Does oil price uncertainty transmit to the Thai stock market?," MPRA Paper 57350, University Library of Munich, Germany.
    6. repec:fau:fauart:v:67:y:2017:i:3:p:166-198 is not listed on IDEAS
    7. repec:eco:journ2:2017-04-27 is not listed on IDEAS
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    9. repec:eee:riibaf:v:42:y:2017:i:c:p:61-74 is not listed on IDEAS
    10. Goodness C. Aye, 2014. "Does Oil Price Uncertainty Matter for Stock Returns in South Africa?," Working Papers 201484, University of Pretoria, Department of Economics.
    11. Elie Bouri & Riza Demirer, 2016. "On the volatility transmission between oil and stock markets: a comparison of emerging importers and exporters," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 33(1), pages 63-82, April.
    12. Komain Jiranyakul, 2014. "Does oil price uncertainty transmit to the Thai stock market?," Journal of Economic and Financial Studies (JEFS), LAR Center Press, vol. 2(6), pages 16-25, December.
    13. repec:eee:ecmode:v:66:y:2017:i:c:p:258-271 is not listed on IDEAS
    14. repec:eee:energy:v:140:y:2017:i:p1:p:185-197 is not listed on IDEAS
    15. Jiranyakul, Komain, 2014. "Does oil price uncertainty transmit to the Thai stock market?," MPRA Paper 57262, University Library of Munich, Germany.
    16. Chkili, Walid & Aloui, Chaker & Nguyen, Duc Khuong, 2014. "Instabilities in the relationships and hedging strategies between crude oil and US stock markets: Do long memory and asymmetry matter?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 33(C), pages 354-366.
    17. Bouri, Elie & Awartani, Basel & Maghyereh, Aktham, 2016. "Crude oil prices and sectoral stock returns in Jordan around the Arab uprisings of 2010," Energy Economics, Elsevier, vol. 56(C), pages 205-214.
    18. repec:spr:eurase:v:7:y:2017:i:2:d:10.1007_s40822-017-0065-1 is not listed on IDEAS
    19. Zhu, Huiming & Guo, Yawei & You, Wanhai & Xu, Yaqin, 2016. "The heterogeneity dependence between crude oil price changes and industry stock market returns in China: Evidence from a quantile regression approach," Energy Economics, Elsevier, vol. 55(C), pages 30-41.
    20. Khalid M. Kisswani & Mohammad I. Elian, 2017. "Do Oil Prices Affect Kuwait Sectoral Stock Prices? Non-Linear Cointegration Evidence," Working Papers 1141, Economic Research Forum, revised 09 2003.
    21. Jouini, Jamel & Harrathi, Nizar, 2014. "Revisiting the shock and volatility transmissions among GCC stock and oil markets: A further investigation," Economic Modelling, Elsevier, vol. 38(C), pages 486-494.
    22. Dhaoui, Abderrazak & Saidi, Youssef, 2015. "Oil supply and demand shocks and stock price: Evidence for some OECD countries," MPRA Paper 63556, University Library of Munich, Germany.

    More about this item

    Keywords

    Saudi stock sectors; World oil price; Optimal weights; Hedge ratios; VAR-GARCH process;

    JEL classification:

    • F3 - International Economics - - International Finance
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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