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Characteristics of permanent and transitory returns in oil-sensitive emerging stock markets: The case of GCC countries
Journal article   Peer reviewed

Characteristics of permanent and transitory returns in oil-sensitive emerging stock markets: The case of GCC countries

Shawkat Hammoudeh and Kyongwook Choi
Journal of international financial markets, institutions & money, v 17(3), pp 231-245
2007
DOI: https://doi.org/10.1016/j.intfin.2005.11.002

Abstract

Markov-switching Permanent and transitory components Transition probability Volatility
The estimates suggest that for both return components there exists a statistically significant high volatility regime for all the Gulf Cooperation Council (GCC) stock markets and the oil market. On the other hand, the results for the low volatility state of both components are mixed. The individual GCC markets vary in terms of sensitivity to volatility and its duration; with Saudi Arabia and Oman having the highest overall return volatility. All the GCC markets are much less volatile than that of the more open, crisis-ridden, oil-exporting Mexico. All GCC returns move in the same direction, whether in terms of total return, fundamentals or fads under both volatility regimes. The correlations between themselves and with Mexico, the oil price and the Morgan Stanley Capital International Index (MSCI) returns are weak compared to the correlations among stock returns of Germany, Japan UK and the US [Bhar, R., Hamori, S., 2004. Empirical characteristics of the permanent and transitory components of stock returns: analysis in a Markov-switching heteroscedasticity framework. Economics Letters 82, 157–165]. Mexico has considerably higher correlation with both MSCI and the oil price than all the GCC countries.

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