How do oil prices affect stock returns in GCC markets? An asymmetric cointegration approach

The aim of this paper is to investigate the existence of long-term relationships between oil price and stock prices in Gulf Corporation Council (GCC) markets. Since most GCC countries are major world energy market players, their stock markets are likely to be susceptible to oil price changes.

To account for the fact that stock market prices may respond asymmetrically to oil price shocks, we propose an approach based on asymmetric cointegration. Indeed, recent papers argue that there is an asymmetric relationship between oil price and the economic activity, which suggests

asymmetric linkages between oil prices and stock markets. The results of the empirical analysis show that oil price changes indeed affect stock market prices in an asymmetric fashion and that, unlike in most net-oil importing countries, the relationship between oil prices and stock market

prices is positive in GCC countries. However, the elasticity of stock prices to oil price sensitively varies from one GCC country to another.