Nonlinearity in the causality and systemic risk spillover between the OPEC oil and GCC equity markets: a pre- and post-financial crisis analysis

This paper investigates the effects of pre- and post-global financial crisis shocks on the dependence structure and systemic risk between the return series of the Organization of the Petroleum Exporting Countries (OPEC) oil price and the Gulf Cooperation Council (GCC) stock markets. We have employed the nonparametric conditional value-at-risk (NCoVaR), quantile cross-spectral coherency and Diebold and Yilmaz connectedness and spillover model as estimation techniques to achieve the objectives. Briefly, our full sample results show that Bahrain is the only stock market to transfer dynamic spillover of volatility to OPEC oil prices. In contrast, all GCC stock markets except Saudi Arabia receive dynamic volatility from OPEC oil. Except for Bahrain, the NCoVaR relation exists in both directions between OPEC oil prices and the GCC markets. The pre-financial crisis period results show that GCC stock markets do not transfer a dynamic spillover of volatility to OPEC oil prices. However, all GCC stock markets except Oman receive dynamic volatility from OPEC oil prices. Our results lend further support to the argument that oil and stock markets behave like “a market of one” after the financialization of global commodities as we provide evidence of contagion between OPEC oil and the GCC stock market. Our results also demonstrate that a better understanding of the dependency between OPEC oil prices and GCC equity markets will provide investors with information that will aid in making risk management decisions and designing investment strategies, as well as aiding policy makers to pursue sound energy and macroeconomic policies.