The Gulf Cooperation Council - Assignment Example

The Gulf Cooperation Council In this essay, I will investigate and showcase the impacts of changes in the oil prices in the performance of stock markets of the Gulf Cooperation Council (GCC) countries. The membership of GCC includes the six countries as Oman, Bahrain, Qatar, Kuwait, United Arab and Saudi Arabia. Many previously conducted studies on the topic indicate a reciprocal and inevitable relationship between the fluctuation in oil prices and the stock market performance in the GCC countries. GCC countries are the chief oil suppliers. Therefore, the fluctuation in oil prices are always attributable to the raised concerns in the international markets particular due to the inevitable relationship between such movements in prices to corporate earnings and economic growth. The paper will thus uncover whether there exist a short or long term connection existing in between GCC stock markets and movements in oil prices. There are inevitable, and reciprocal short-term linkages noted in Qatar, UEA, and Saudi Arabia. Thus, the occurrence of causality shifts from oil prices to the stock market performance. In addition, less long-term relationships have been with oil prices and the stock performance in GCC with the sole exception of Bahrain. However, other studies have found a stronger relationship between oil prices and stock market performance in GCC. Therefore, evidence shows a strong long run relationship in Bahrain between oil price fluctuation and stock market performance that took the cue from oil prices. Other evidence also justifies that shocks attributable to volatility attracts many concerns in GCC than shocks attached to oil price returns. In the subsequent discussion of this article, I, therefore, expand on the short and long term relationship between stock market performance and oil price movement in the GCC countries. The analysis of the relationships between stock market performance and oil price fluctuations is executed both at country and industry levels. The evidence shows that at the country level, with the exception of Kuwait, stock markets have great positive exposures to oil prices shocks. However, at the industry level the reactions of industry-specific returns to oil price movements are greatly positive for 12 of the 20 countries studied. Therefore, oil price alterations indicate the asymmetric impact on stock market returns in the country alongside the industry level. The Kuwait and Bahrain stock markets are found to practice speculative markets that are greatly marred by the influence of non-predictable speculative factors. However, the other four GCC member the stock prices are determined by the harmonious reciprocal working relationship between the speculative effects and oil price uncertainty. In the long-run, the impacts of the oil prices movements in the GCC stock prices prevail since oil price effect transmits to macroeconomic indicators that significantly determine market liquidity. Therefore, the findings point out that the impact of oil price movements transmits to a greater macroeconomic indicators and in turn influence the long-run equilibrium relationships between GCC markets. Such findings are attributable to such conditions that depict alterations observable factors affecting the economy. On the other hand, GCC market possess conditions that purely operate within a market within the short-run. Such conditions may at times seem to work together and other times showcase a reciprocal working relationships. Such uncertainties in relationships collapse into a particular market simultaneously being speculatively strong and greatly weak with the reverse still holding. Therefore, the long-term connection between the stock market performances in the GCC ushers when oil prices fluctuate transmit to major macroeconomic indicators that dictate the profitability of the firms traded in GCC stock markets. It is also worth noting that fads or speculative shocks in the GCC do not arise from the intensive capital flow in and out of the GCC markets as conventional in other markets that are emerging. Such fads shocks are realized when local markets overheat. In the GCC, there is a restriction framework to regulate and limit foreign ownership that in turn constrained the flow of hot money in and out such markets. In addition, there is less turnover with the exemption of Saudi Arabia and Kuwait. Volatility is traceable to the publicly traded companies dominating the stock market. There is frequent hedging fads resulting from the uncertainty in the returns of the GCC traded companies such Banks and Real Estates (Hammoudeh and Alesia, 2004). There are weekly oil prices cues from the West Texas Intermediate’s futures in the GCC countries due to the overdependence on oil. Further, the GCC stock market are also sensitive to weekly or daily fluctuation of stock prices in the United States stock exchanges (Fasano and Iqbal, 2003). This is because GCC investors ventures in both sets of the market. Therefore, studying and understanding the oil price volatility with GCC stock markets return is the significance for investor’s rational decision-making as well as the policy makers to embrace best practices in stock market management. Oil price fluctuation always transmits its impact on the GCC stock market performance through its influence on the relevant macroeconomic variable. It is, therefore, valid that we determine the relationships between stock market prices and macroeconomic variables. On the contrary, such approach is inapplicable to the GCC countries a number of GCC markets were formerly established as regulated markets solely in the past six years. Therefore, understanding the connection between stock market performance and changes in oil prices calls for a first distinction between the effects of unobservable variables from the oil prices effect on GCC stock markets. Therefore, this perspective is timely and significance in the GCC countries to present investors with the proactive and valuable information to answer the escalated doubts raised by investors and policy makers about the compatibility of GCC stock markets’ behavior with GCC economies fundamentals (Dar and Presley, 2001). Therefore, the discussion concludes that the GCC stock markets are susceptible to effects of oil price shocks since they are the major world energy players. Finally, the findings need to attract significance attentions from researchers, market participants, and regulators. Particularly, the GCC nation’s policymakers in OPC must maintain a close eye on the fluctuations of oil price on their individual economies as well as stock markets. Reference Dar, H.A., and Presley, J.R. (2001). The Gulf Cooperation Council: a slow path to integration? World Econ, 24, 1161–1178. DeJong, D., J., Nankervis, N., Savin and C., Whiteman. (1992). Integration versus trend stationarity in macroeconomic time-series. Econometrica, Vol. 60, pp. 423–34. Fasano, U., and Iqbal, I. (2003). GCCCountries: from oil dependence to diversification. I.M.F,Washington, Unpublished IMF working paper Hammoudeh, S., and Alesia, E. (2004). Links and volatility transmission between NYMEX oil futures and the GCC stock market indices. Contemp. Econ. Policy, 22, 250–269. Hammoudeh, S., and Choi, K. (2005). Characteristics of the permanent and transitory returns in the oil-sensitive emerging stock markets: the case of the GCC Countries. Drexel University, Philadelphia, Unpublished working paper. Hammoudeh, S., and E., Aleisa (2004). Dynamic relationship among GCC stock markets and NYMEX oil futures. Contemporary Economic Policy, Vol. 22, pp. 250–69. Read More