The Reaction of Stock Markets in the Gulf Cooperation Council Countries to Economic Policy Uncertainty in the United States

Open access

Abstract

This study investigates if the changes in economic policy uncertainty in the U.S. can explain the returns on stock markets of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. The study also examines how the stock market returns of the six GCC countries respond to the changes in economic policy uncertainty in the U.S. The results demonstrate that changes in economic policy uncertainty in the U.S. are not significantly linked with the returns on all the stock markets except Oman stock market, which shows a statistical significant negative relationship with the changes in economic policy uncertainty in the U.S. Controlling for the effects of the U.S. stock market and oil price, returns on all the six GCC markets including Oman show insignificant coefficients. The returns on all the stock markets do not respond to the changes in economic policy uncertainty. The results of Granger causality tests show that the changes in economic policy uncertainty in the U.S. do not cause the returns of all the six GCC stock markets.

Anthony, J. D. (1999). US-GCC Trade and Investment Relations, US-GCC Corporate Cooperation Committee, Washington, DC.

Basu, S., & Bundick, B. (2014). Uncertainty Shocks in a Model of Effective Demand. NBER Working paper 18420. Retrieved from https://www.nber.org/papers/w18420.pdf

Bayoumi, T., & Swiston, A. (2007). Foreign Entanglements: Estimating the Source and the Size of Spillover Across Industrial Countries. IMF Working Paper WP/07/128, June.

Becker, K. G., Finnerty, J. E., & Friedman, J. (1995). Economic News and Equity Market Linkages between the US and UK. Journal of Banking & Finance, 19(7), 1191-1210. https://doi.org/10.1016/0378-4266(94)00079-I

Beirne, J., Caporale, G. M., Schulze - Ghattas, M., & Spagnolo, N. (2010). Global and Regional Spillovers in Emerging Stock Markets: A Multivariate GARCH - in - Mean Analysis. Emerging Markets Review, 11(3), 250-260. https://doi.org/10.1016/j.ememar.2010.05.002

Bernanke, B. S. (1983). Irreversibility, Uncertainty and Cyclical Investment. Quarterly Journal of Economics, 98(1), 85-106. https://doi.org/10.2307/1885568

Boako, G., & Alagidede, P. (2018). African Stock Markets in the Midst of the Global Financial Crisis: Recoupling or Decoupling? Research in International Business and Finance, 46, 166-180. https://doi.org/10.1016/j.ribaf.2018.02.001

Born, B., & Pfeifer, J. (2014). Policy Risk and the Business Cycle. Journal of Monetary Economics, 68, 68-85. https://doi.org/10.1016/j.jmoneco.2014.07.012

Ehrmann, M., & Fratzscher, M. (2004). Equal Size, Equal Role? Interest Rate Interdependence between the Euro Area and the United States. The Economic Journal, 115(506), 928-948. https://doi.org/10.1111/j.1468-0297.2005.01025.x

Ehrmann, M., & Fratzscher, M. (2009). Global Financial Transmission of Monetary Policy Shocks. Oxford Bulletin of Economics and Statistics, 71(6), 739-759. https://doi.org/10.1111/j.1468-0084.2009.00561.x

European Commission. (2018). European Union, Trade in Goods with GCC. Retrieved from trade.ec.europa.eu/doclib/docs/2006/September/tradeec_113482.pdf

Fadejeva, L., Feldkircher, M., & Reininger, T. (2017). International Spillovers from Euro Area and US Credit and Demand Shocks: A Focus on Emerging Europe. Journal of International Money and Finance, 70, 1-25. https://doi.org/10.1016/j.jimonfin.2016.08.001

Fernandez - Villaverde, J., Guerron - Quintana, P., Kuester, K., & Rubio -Ramirez, K. (2015). Fiscal Volatility Shocks and Economic Activity. American Economic Review, 105(11), 3352-3384. https://doi.org/10.1257/aer.20121236

Fratzscher, M., Lo Duca, M., & Straub, R. (2018). On the International Spillovers of US Quantitative Easing. The Economic Journal, 128(608), 330-377. https://doi.org/10.1111/ecoj.12435

Friedman, M. (1968). The Role of Monetary Policy’, American Economic Review, 58(1), 1-17. Retrieved from http://itech.fgcu.edu/faculty/bhobbs/Milton%20Friedman%20The%20Role%20of%20Monetary%20Policy.pdf

Gilchrist, S., Sim, J. W., & Zakrajšek, E. (2014). Uncertainty, Financial Frictions and Investment Dynamics. NBER Working Paper 20038. Retrieved from https://www.nber.org/papers/w20038.pdf

Goldberg, L. S., & Leonard, D. (2003). What Moves Sovereign Bond Markets? The Effects of Economic News on US and German Yields. Current Issues in Economics and Finance, 9(9), 1-7. Retrieved from https://www.newyorkfed.org/medialibrary/media/research/current_issues/ci9-9.pdf

Hamao, Y., Masulis, R.W., & Ng, V. (1990). Correlations in Price Changes and Volatility Across International Stock Markets. Review of Financial Studies, 3(2), 281-307. https://doi.org/10.1093/rfs/3.2.281

Hassett, K. A., & Metcalf, G. E. (1999). Investment with Uncertain Tax Policy: Does Random Tax Policy Discourage Investment? The Economic Journal, 109(457), 372-393. https://doi.org/10.1111/1468-0297.00453

Higgs, R. (1997). Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed After the War. The Independent Review, 1(4), 561-590. Retrieved from https://www.jstor.org/stable/24560785

Johansson, A. C., & Ljungwall, C. (2009). Spillover Effects among the Greater China Stock Markets. World Development, 37(4), 839-851. https://doi.org/10.1016/j.worlddev.2008.07.015

Kim, S. J., Salem, L., & Wu, E. (2015). The Role of Macroeconomic News in Sovereign CDS Markets: Domestic and Spillover News Effects from the U.S, the Eurozone and China. Journal of Financial Stability, 18, 208-224. https://doi.org/10.1016/j.jfs.2015.04.008

King, M., Sentana, E., & Wadhwani, S. (1994). Volatility and Links between National Stock Markets. Econometrica, 62(4), 901-933. https://doi.org/10.2307/2951737

Leduc, S., & Liu, Z. (2015). Uncertainty Shocks are Aggregate Demand Shocks. Federal Reserve Bank of San Francisco Working Paper 2012-10. Retrieved from https://www.frbsf.org/economic-research/files/wp12-10bk.pdf

Lin, W., Engle, R. F., & Ito, T. (1994). Do Bulls and Bears Move Across Borders? International Transmission of Stock Returns and Volatility. Review of Financial Studies, 7(3), 507-538. https://doi.org/10.1093/rfs/7.3.507

Marquez, M. A., Ramajo, J., & Hewings, G. J. D. (2015). Regional Growth and Spatial Spillovers: Evidence from a SPVAR for the Spanish regions. Regional Science, 94(1), 1-18. https://doi.org/10.1111/pirs.12102

Marquez - Ramos, L. (2016). Port Facilities, Regional Spillovers and Exports: Empirical Evidence from Spain’, Regional Science, 95(2), 329-351. https://doi.org/10.1111/pirs.12127

Ouyang, P., & Fu, S. (2012). Economic growth, local industrial development and Inter-Regional Spillovers from Foreign Direct Investments: Evidence from China. China Economic Review, 23(2), 445-460. https://doi.org/10.1016/j.chieco.2012.03.005

Panousi, V., & Papanikolaou, D. (2012). Investment, Idiosyncratic Risk and Ownership. Journal of Finance, 67(3), 1113-1148. https://doi.org/10.1111/j.1540-6261.2012.01743.x

Pastor, L., & Veronesi, P. (2012). Uncertainty about Government Policy and Stock Market Prices. Journal of Finance, 67(4), 1219-1264. https://doi.org/10.1111/j.1540-6261.2012.01746.x

Pastor, L., & Veronesi, P. (2013). Political Uncertainty and Risk Premia. Journal of Financial Economics, 110(3), 520-545. https://doi.org/10.1016/j.jfineco.2013.08.007

Rodrik, D. (1991). Policy Uncertainty and Private Investment. Journal of Development Economics, 36(2), 229-242. https://doi.org/10.1016/0304-3878(91)90034-S

Sugimoto, K., Matsuki, T., & Yoshida, Y. (2014). The Global Financial Crisis: An Analysis of Spillover Effects on African Stock Markets. Emerging Markets Review, 21, 201-233. https://doi.org/10.1016/j.ememar.2014.09.004

Sum, V. (2012). Economic Policy Uncertainty and Stock Market Performance: Evidence from the European Union, Croatia, Norway, Russia, Switzerland, Turkey and Ukraine, Journal of Money, Investment and Banking, 25, 99-104. https://doi.org/10.2139/ssrn.2094175

World Bank. (2010). Economic Integration in the GCC. Retrieved from https://siteresources.worldbank.org/INTMENA/Resources/GCCStudyweb.pdf.

Zhou, X., Zhang, W., & Zhang, J. (2012). Volatility Spillovers between the Chines and World Equity Markets. Pacific - Basin Finance Journal, 20(2), 247-270. https://doi.org/10.1016/j.pacfin.2011.08.002

Journal Information

Metrics

All Time Past Year Past 30 Days
Abstract Views 0 0 0
Full Text Views 69 69 27
PDF Downloads 68 68 21