Oil And World Stock Markets' Reaction To The Gulf Crisis

This paper uses two methodologies to empirically investigate the economic significance of the Gulf Crisis on the oil and world equity markets. The first methodology is an event study based on the market and risk-adjusted return. Daily and cumulative abnormal returns are calculated for selected multi-day intervals for 12 world equity markets. The results indicate that significant negative abnormal returns materialized on the third day after the Iraqi invasion of Kuwait, while significant positive abnormal returns were observed two days after the war began. Furthermore both of these findings are stronger for portfolios of national markets of countries that are oil importing. The second methodology uses Granger causality between oil and world equity markets to confirm the importance of oil. While little causality is detected between oil and world equity markets prior to the invasion of Kuwait, strong contemporaneous causality and an increase in lead-lag and feedback is present between these markets during the Gulf Crisis period.