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Asymmetric effects of oil shocks on stock market returns in Saudi Arabia: evidence from industry level analysis

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Abstract

We examine the impact of oil price shocks on stock market returns in Saudi Arabia using the country-level as well as the industry-level stock market data. We find that the relation between changes in oil prices and equity returns is positive and significant at the country-level and at the industry level. Our results show that oil prices have asymmetric effects on equity returns for 4 out of 15 industrial sectors (e.g., hotel and tourism, insurance, multi-investment, and petrochemicals). These results have significant implications for investors, portfolio managers, policymakers, and corporate finance managers.

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Notes

  1. According to British Petroleum data at the end of 2009, Saudi Arabia is the world’s largest oil producer with approximately 19.8 percent of total world’s reserve.

  2. On May 25, 1981, six countries of the Arab Gulf region (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates) ratified the charter that established the Cooperation Council for the Arab States of the Gulf, known as Gulf Cooperation Council (GCC) countries hereafter.

  3. For example, Bahrain is less reliant on oil than Saudi Arabia.

  4. Individual country’s efforts to diversify and liberalize the economy differ across GCC countries. For example, Saudi Arabian state-controlled companies also dominate the listing. The stock market capitalization of Saudi Arabia typically concentrates on banking, insurance, and service industries. These elements are likely to undermine normal market operations such as arbitrage and speculation in the Saudi stock market.

  5. Proponents of sectoral shocks (sectoral shift) hypothesis (e.g., Lilien (1982) and Davis (1987)) suggest that when oil prices fall or rise resources are likely to be reallocated from declining to expanding sectors of the economy.

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Acknowledgements

We thank Michel Habib and two anonymous referees for helpful comments and suggestions. We gratefully acknowledge the research support from Baruch College, and Brooklyn College of City University of New York. We are thankful to Mr. Jafar Awad Ahmed (Advisor, Market Statistics and Indexes at the Saudi Stock Exchange, Tadawul) for providing us with valuable information related to the Saudi Stock Market. We thank seminar participants at the 2012 World Finance Conference on an earlier version of our paper.

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Authors and Affiliations

  1. Department of Finance, Koppelman School of Business, Brooklyn College, City University of New York (CUNY), Brooklyn, NY, USA

    Sunil K. Mohanty

  2. Department of Economics and Finance, Zicklin School of Business, Baruch College, City University of New York (CUNY), New York, NY, USA

    Joseph Onochie

  3. Department of Business Administration, College of Administrative & Financial Sciences, King Khalid University, Abha, Saudi Arabia

    Abdulrahman F. Alshehri

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  1. Sunil K. Mohanty
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Correspondence to Sunil K. Mohanty.

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Mohanty, S.K., Onochie, J. & Alshehri, A.F. Asymmetric effects of oil shocks on stock market returns in Saudi Arabia: evidence from industry level analysis. Rev Quant Finan Acc 51, 595–619 (2018). https://doi.org/10.1007/s11156-017-0682-5

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