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The influence of oil prices on the banking sector in oil-exporting economies: Is there a psychological barrier?

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  • Alqahtani, Faisal
  • Samargandi, Nahla
  • Kutan, Ali M.

Abstract

This paper examines the relationship between crude oil prices and banking sector market indices in the oil-exporting economies of the Gulf Cooperation Council (GCC), using daily frequency data over 2010–2017. Controlling for global banking impacts (S&P500 Banking Index) and interest rates (T-bills), dynamic ordinary least squared (DOLS) and fully modified ordinary least squared (FM-OLS) analysis indicates that oil prices positively affect bank indices until the $95 per barrel mark, after which the impact becomes negative, close to the psychological barrier found in the US equity market. The S&P500 Banking Index positively affects the GCC banking sector, whereas the interest rate affects it negatively. The validity of an inverse U-shaped relationship between crude oil price and banking sector indices is demonstrated. Causality analysis reveals the existence of bidirectional causalities between the prices of crude oil, GCC banking sectors, and the US banking sector. This paper demonstrates a vital non-linear relationship for oil-banking portfolio management and hedging strategies with oil price risk.

Suggested Citation

  • Alqahtani, Faisal & Samargandi, Nahla & Kutan, Ali M., 2020. "The influence of oil prices on the banking sector in oil-exporting economies: Is there a psychological barrier?," International Review of Financial Analysis, Elsevier, vol. 69(C).
    • Handle: RePEc:eee:finana:v:69:y:2020:i:c:s1057521920301149
    DOI: 10.1016/j.irfa.2020.101470
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    2. Roudari, Soheil & Sadeghi, Abdorasoul & Gholami, Samad & Mensi, Walid & Al-Yahyaee, Khamis Hamed, 2023. "Dynamic spillovers among natural gas, liquid natural gas, trade policy uncertainty, and stock market," Resources Policy, Elsevier, vol. 83(C).
    3. Mollick, André V. & Killins, Robert N. & Egly, Peter V. & Johnk, David W., 2024. "Bank equity returns and oil prices: The story from U.S. regional banks during the “shale oil” revolution," Research in International Business and Finance, Elsevier, vol. 70(PA).
    4. Bouri, Elie & Hammoud, Rami & Kassm, Christina Abou, 2023. "The effect of oil implied volatility and geopolitical risk on GCC stock sectors under various market conditions," Energy Economics, Elsevier, vol. 120(C).
    5. Ma, Yu & Zhang, Yang & Ji, Qiang, 2021. "Do oil shocks affect Chinese bank risk?," Energy Economics, Elsevier, vol. 96(C).
    6. Al-Fayoumi, Nedal & Bouri, Elie & Abuzayed, Bana, 2023. "Decomposed oil price shocks and GCC stock market sector returns and volatility," Energy Economics, Elsevier, vol. 126(C).
    7. Nasim, Asma & Downing, Gareth, 2023. "Energy shocks and bank performance in the advanced economies," Energy Economics, Elsevier, vol. 118(C).
    8. Razmi, Seyedeh Fatemeh & Razmi, Seyed Mohammad Javad, 2023. "The role of stock markets in the US, Europe, and China on oil prices before and after the COVID-19 announcement," Resources Policy, Elsevier, vol. 81(C).
    9. Maghyereh, Aktham & Abdoh, Hussein & Al-Shboul, Mohammad, 2022. "Oil structural shocks, bank-level characteristics, and systemic risk: Evidence from dual banking systems," Economic Systems, Elsevier, vol. 46(4).
    10. Elsayed, Ahmed H. & Naifar, Nader & Uddin, Gazi Salah & Wang, Gang-Jin, 2023. "Multilayer information spillover networks between oil shocks and banking sectors: Evidence from oil-rich countries," International Review of Financial Analysis, Elsevier, vol. 87(C).

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    More about this item

    Keywords

    Oil prices; Banking indices; GCC; DOLS; FMOLS;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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