Oil Price Changes and Stock Market Performance in UAE: Evidence of Cointegration Persists in Economic Diversification era

Abstract

The aim of this paper is to examine the linkages between stock market index, Dubai Fateh oil spot price, interest rate and FDI using monthly data on Abu Dhabi stock index for the period 2006- 2019. Vector Autoregressive Model have been employed to analyse the relationship between the variables. Using monthly data from 2006 to 2019, the results of Vector Error Correction Model (VECM) estimates suggest that there is long-run integration between oil price and monthly stock index series in which monthly oil prices have a positive impact on stock index. The Granger Causality indicates significant bidirectional causality running from ADX index, oil price and EIBOR. Meanwhile there is unidirectional causality from stock market index to FDI. Furthermore, Impulse Response Function was employed to examine market response to oil price shocks and our study reveals that UAE stock market is efficient as it responds immediately to the oil shock. These findings are relevant for investors for portfolio management and for the policymakers such that more aggressive economic diversification policies are initiated to wane the significant persistent oil-stock integration.

Oil Shocks, Monetary Policy, and Stock Returns: A Case of Oil-based Economy

“…In contrast with previous research, the study reveals positive impact of oil shocks on the Saudi stock market, that is consistent with the empirical findings on net oil-exporters by studies such as Marashdeh and Afandi (2017), Awartani et al (2018), andBanerjee et al (2023). Moreover, the present paper finds an overall weak impact monetary policy on the stock market.…”

“…Similarly, this negative impact has been concluded in some emerging economies such as the BRICS economies, Mexico, Malaysia, Thailand, Chile, and Indonesia (Raza et al, 2016). In contrast, some studies conclude a positive effect of oil prices on stock markets, mainly in net-oil exporting countries (e.g., Marashdeh and Afandi, 2017;Awartani et al, 2018;Mohanty et al, 2018;Banerjee et al, 2023). In fact, it is argued that the relationship between oil and stock markets is positive for oilexporters and negative for oil-importers (Wang et al, 2013) Research on the relationship between monetary policy and financial markets has experienced a noticeable surge in the last two decades, especially for the developed countries.…”