The Role of Oil as a Determinant of Stock Market Interdependence: The Case of the USA and GCC

Abstract

This paper focuses on oil as a key determinant in US-GCC stock market interdependence. The analysis uses monthly data over the period from January 2003 to December 2019. The interdependence between the US and GCC is established using the Asymmetric Dynamic Conditional Correlation model. We then investigate the impact of both oil and a range of macroeconomic variables on the nature of the correlation. Our results find that oil returns and volatility significantly explain changes in the US-GCC correlation. Echoing the recent financialization of oil, sub-sample analysis reveals the increasing importance of oil in determining interdependence. Further, the effect of oil displays asymmetric tail dependence with the correlation, where the oil impact is more pronounced in the upper tail of the correlation’s conditional distribution. Both oil and financial shocks coincide with structural breaks in the correlation series. A series of robustness tests, including alternative correlation and oil measures continue to support the results.