Skip to main content
SpringerLink
Log in

Oil prices, stock market returns, and volatility spillovers: evidence from Saudi Arabia

  • Original Paper
  • Published:
International Economics and Economic Policy Aims and scope Submit manuscript

Abstract

This work reinvestigates the interrelationship between crude oil prices and stock market returns in Saudi Arabia by taking into account volatility spillovers that are exemplified by second-moment effects. Using weekly data from 2001 to 2018 and time-varying causality-in-mean and causality-in-variance tests and taking into account structural breaks, we model each series as an APARCH process to capture any leverage effects in the volatility of returns. Empirical results suggest the existence of a bidirectional causality relationship between stock and oil performance series. While we fail to document significant spillover effects stemming from the stock market to the oil market, we detected substantial spillover effects running from crude oil price changes to stock market returns. We also find evidence in favor of the presence of risk spillovers between crude oil price and stock market. In this context, unexpected loses in the oil market can be predicted by using sudden past declines in the Saudi Arabian stock market and a substantial increase in the oil price seems to have significant predictive power for a rise in the stock market in the future. These results suggest that government policies must take into account risk spillover effects between markets and that investors are better off monitoring crude oil markets in portfolio allocation decisions.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1

Similar content being viewed by others

References

  • Alturki F, Khan A (2015( Oil prices and the Saudi stock exchange (Tadawul). Jadwa Investment

  • Apergis N, Miller SM (2009) Do structural oil-market shocks affect stock prices? Ene Econo 31:569–575

    Google Scholar 

  • Arouri M, Fouquau J (2009) On the short-term influence of oil price changes on stock markets in GCC countries: linear and nonlinear analysis. Econ Bull 29(2):795–804

    Google Scholar 

  • Arouri MEH, Bellalah M, Nguyen DK (2011) Further evidence on the responses of stock prices in GCC countries to oil price shocks. Int J of Bus 16(1):89–102

    Google Scholar 

  • Arouri MEH, Lahiani A, Bellalah M (2010) Oil price shocks and stock market returns in oil-exporting countries: the case of GCC countries. Int J of Econo and Fin 2(5):132–139

    Google Scholar 

  • Asteriou D, Bashmakova Y (2013) Assessing the impact of oil returns on emerging stock markets: A panel data approach for ten Central and Eastern European Countries. Energy Econ 38:204–211

    Google Scholar 

  • Asteriou D, Dimitras A, Lendewig A (2013) The influence of oil prices on stock market returns: empirical evidence from oil exporting and oil importing countries. Int J Bus Manag 8(18):101–120

    Google Scholar 

  • Bali TG (2000) Testing the Empirical Performance of Stochastic Volatility Models of the Short Term Interest Rate. The J of Fin and Quant Analy 35:191–215

    Google Scholar 

  • Benk S, Gillman M (2020) Granger predictability of oil prices after the Great Recession. Journal of International Money and Finance 101:1–10

    Google Scholar 

  • Bouri E (2015) Return and volatility linkages between oil prices and the Lebanese stock market in crisis periods. Energy. 89:365–371

    Google Scholar 

  • Chang CL, McAleer M, Tansuchat R (2010) Analyzing and forecasting volatility spillovers, asymmetries and hedging in major oil. Energy Econ 32(6):1445–1455

    Google Scholar 

  • Cheung YW, Ng LK (1996) A causality-in-variance test and its application to financial market prices. J of Econo 72:33–48

    Google Scholar 

  • Choi K, Hammoudeh S (2010) Volatility behavior of oil, industrial commodity and stock markets in a regimeswitching environment. Energy Policy 38(8):4388–4399

    Google Scholar 

  • Ciner C (2001) Energy shocks and financial Markets: Nonlinear linkages. Studies in Nonlinear Dynamics and Econometrics Quarterly Journal 5(3):203–212

    Google Scholar 

  • Cunado J, Perez de Gracia F (2003) Do oil price shocks matter? Evidence for some European countries. Energy Econ 25:137–154

    Google Scholar 

  • Cunado J, Perez de Gracia F (2014) Oil price shocks and stock market returns: Evidence for some European countries. Energy Econ 42:365–377

    Google Scholar 

  • Dibooglu S, Aleisa E (2004) Oil prices, terms of trade shocks, and macroeconomic fluctuations in Saudi Arabia. Contem Econo Pol 22(1):50–62

    Google Scholar 

  • Ding Z, Granger CWJ, Engle RF (1993) A long memory property of stock market returns and a new model. J of Empi Fina 1:83–106

    Google Scholar 

  • Du L, He Y (2015) Extreme risk spillovers between crude oil and stock markets. Ener Econo 51:455–465. https://doi.org/10.1016/j.eneco.2015.08.007

    Article  Google Scholar 

  • El-Sharif I, Brown D, Burton B, Nixon B, Russell A (2005) Evidence on the nature and extent of the relationship between oil prices and equity values in the UK. Energy Econ 27(6):819–830

    Google Scholar 

  • Faff RW, Brailsford JT (1999) Oil price risk and the Australian stock market. J Energy Finance Dev 4(1):69–87

    Google Scholar 

  • Fan Y, Zhang Y-J, Tsai H-T, Wei Y-M (2008) Estimating ‘Value at Risk’ of Crude OilPrice and Its Spillover Effect Using the GED-GARCH Approach. Ener Econo 30(6):1356–1371

    Google Scholar 

  • Fong FM, See KE (2002) A Markov switching model of the conditional volatility of crude oil futures prices. Energy Econ 24(1):71–95

    Google Scholar 

  • Galeano P, Tsay RS (2010) Shifts in individual parameters of a GARCH model. J of Fina Econo 8(1):122–153

    Google Scholar 

  • Gebka B, Serwa D (2007) Intra- and inter-regional spillovers between emerging capital markets around the world. Rese in Inter Bus and Fin 21:203–221

    Google Scholar 

  • Giot P, Laurent S (2004) Modeling daily value-at-risk using realized volatility and ARCH type models. Jof Emp Fina 11(3):379–398

    Google Scholar 

  • Hillebrand E (2005) Neglecting parameter changes in GARCH models. J of Econo 129:121–138

    Google Scholar 

  • Hong Y (2001) A test for volatility spillover with application to exchange rates. J of Econo 103:183–224

    Google Scholar 

  • Hong Y, Li H, Zhao F (2004) Out-of-sample performance of Discrete-time Spot Interest Rate Models. J of Bus and Econo Stat 22:457–473

    Google Scholar 

  • Hong Y, Li H, Zhao F (2007) Can the Random Walk Model be Beaten in Out-of-sample Density Forecasts? Evidence from Intraday Foreign Exchange Rates. J of Econo 141:736–776

    Google Scholar 

  • Hong Y, Liu Y, Wang S (2009) Granger Causality in Risk and Detection of Extreme Risk Spillover between Financial Markets. J of Econo 150:271–287

    Google Scholar 

  • Huang RD, Masulis RW, Stoll HR (1996) Energy shocks and financial markets. J Futur Mark 16(1):1–27

    Google Scholar 

  • Huang B, Hwang MJ, Hsiao-Ping P (2005) The asymmetry of the impact of oil price shocks on economic activities: an application of the multivariate threshold model. Energy Econ 27(3):455–476

    Google Scholar 

  • Javed F, Mantalos P (2011) The sensitivity of the causality invariance tests to GARCH (1,1) processes. Chil J of Stat 6(1):49–65

    Google Scholar 

  • Jones CM, Kaul G (1996) Oil and Stock Markets. J Financ 51(2):463–491

    Google Scholar 

  • Jouini J (2013) Return and volatility Interaction between oil prices an stock markets in Saudi Arabia. Jl of Econo Model 35:1124–1144

    Google Scholar 

  • Khalfaoui R, Sarwar S, Kumar TA (2019) Analyzing volatility spillover between the oil market and the stock market in oil-importing and oil-exporting countries: Implications on portfolio management. Reso Pol 62:22–32

    Google Scholar 

  • Khalfaouia R, Sarwarc S, Tiwarie A (2019) Analyzing volatility spillover between the oil market and the stock marketin oil-importing and oil-exporting countries: implications on portfolio management. Reso Pol 62(2019):22–32

    Google Scholar 

  • Kupiec P (1995) Techniques for verifying the accuracy of risk measurement models. J Deriv 3:73 84

    Google Scholar 

  • Lee Y-H, Chiou JS (2011) Oil sensitivity and its asymmetric impact on the stock market. Energy. 36:168–174

    Google Scholar 

  • Longin FM (2000) From Value at Risk to Stress Testing: The Extreme Value Approach. J of Bank & Fin 24:1097–1130

    Google Scholar 

  • Lu F, Qiao H, Wang S, Lai KK, Li Y (2016) Time-varying Coefficient Vector Autoregressions Model Based on Dynamic Correlation with An Application to Crude Oil and Stock Markets. Environ Res 152:351–359

    Google Scholar 

  • Malik F, Hammoudeh S (2007) Shock and volatility transmission in the oil, US and Gulf equity markets. Int. Rev. Econ. Fina 16:357–368

    Google Scholar 

  • Mantalos P, Shukur G (2010) The effect of spillover on the Granger causality test. J of Appl Stat 37:1473–1486

    Google Scholar 

  • Mensi W (2019) The global financial crisis and co-movements between oil prices and sector stock markets in Saudi Arabia: A VaR based wavelet. Bor Istal Revi 19(1):24–38

    Google Scholar 

  • Nomikos NK, Pouliasis PK (2011) Forecasting petroleum futures markets volatility: The role of regimes and market conditions. Energy Econ 33(2):321–337

    Google Scholar 

  • Pantelidis T, Pittis N (2004) Testing for Granger causality in variance in the presence of causality in mean. Econ Lett 85:201–207

    Google Scholar 

  • Park J, Ratti RA (2008) Oil price shocks and stock markets in the US and 13 European countries. Ener Econo 30:2587–2608

    Google Scholar 

  • Ping L, Ziyi Z, Tianna Y, Qingchao Z (2018) The relationship among China's fuel oil spot, futures and stock markets. Finance Res Lett 24:151–162

    Google Scholar 

  • Rodrigues PMM, Rubia A (2007) Testing for causality in variance under nonstationarity in variance. Econ Lett 97:133–137

    Google Scholar 

  • Sadorsky P (1999) Oil price shocks and stock market activity. Energy Economics 2:449–469

    Google Scholar 

  • Sanso A, Arago V, Carrion JL (2004) Testing for change in the unconditional variance of financial time series. Revista de Econ Finan 4:32–53

    Google Scholar 

  • Sarwar S, Khalfaouib R, Waheeda R, Ghorbani H (2019) Volatility spillovers and hedging: Evidence from Asian oil-importing countries. Resou Pol 61:479–488

    Google Scholar 

  • Shahbaz M, Naeem M, Ahad M, Tahir I (2018) Is natural resource abundance a stimulus for financial development in the USA? Resou Pol 55:223–232

    Google Scholar 

  • Trabelsi N (2017) Tail dependence between oil and stocks of major oil-exporting countries using the CoVaR approach. Bor Istan Rev 17(4):228–237

    Google Scholar 

  • Van Dijk D, Osborn DR, Sensier M (2005) Testing for causality invariance in the presence of breaks. Econo Lett 89:193–199

    Google Scholar 

  • Wasiuzzaman S, Al-Musehel NA (2018) Mood, religious experience and the Ramadan effect. Int J of Emerging Markets 13(1):290–307

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Department of Economics, Faculty of Economics and Administrative Sciences, Namik Kemal University, Tekirdag, Turkey

    Emrah Ismail Cevik

  2. Department of Finance and Economics, College of Business Administration, University of Sharjah, Sharjah, United Arab Emirates

    Sel Dibooglu & Atif Awad Abdallah

  3. Department of Accounting and Finance, College of Business Administration, Al Yamamah University, Riyadh, Saudi Arabia

    Eisa Abdulrahman Al-Eisa

Authors
  1. Emrah Ismail Cevik
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Sel Dibooglu
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Atif Awad Abdallah
    View author publications

    You can also search for this author in PubMed Google Scholar

  4. Eisa Abdulrahman Al-Eisa
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Atif Awad Abdallah.

Additional information

Publisher’s note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Cevik, E.I., Dibooglu, S., Awad Abdallah, A. et al. Oil prices, stock market returns, and volatility spillovers: evidence from Saudi Arabia. Int Econ Econ Policy 18, 157–175 (2021). https://doi.org/10.1007/s10368-020-00484-0

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10368-020-00484-0

Keywords

Search

Navigation