International CAPM and Oil Price: Evidence from Selected OPEC Countries

This study explores the major driving forces of stock market integration in the four major OPEC oil-exporting countries, namely Venezuela, United Arab Emirates, Saudi Arabia and Kuwait, over the period Au-gust 31, 2000 to June 31, 2012. Stock market integration factors are categorized into 3 groups: macroeconomic characteristics, oil price and return on the world market portfolio. We measure market integration based on a conditional version of the International Capital Asset Pricing Model (ICAPM). Our study differs from past ones in that we investigate the integration of stock market into the world market, using oil price as a common source of risk, in addition to world and domestic sources of risk. Our results show that oil-exporting countries seem to be still significantly segmented from the global market. Their integration degree varies widely through time over the period August 2000 to June 2012 and increases during crisis periods, in particular as from the end of 2009. Oil risk represents a small part of the global risk in all the countries. Venezuela exhibits some peculiarities: market openness drives integration; moreover, dynamic correlations of the stock market with respect to the world market and oil price are quite weak or not significant, as local risks predominate.
JEL Codes: G12; F36; C32.
Keywords: OPEC Countries; Time-Varying Integration; ICAPM; Risk Premium; DCC-GJR-GARCH.