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The Impact of Crude Oil Price on Islamic Stock Indices of Gulf Cooperation Council (GCC) Countries: A Comparative Analysis

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  • Rithuan, Syahidah Hanis Meor
  • Abdullah, Ahmad Monir
  • Masih, Abul Mansur M.

Abstract

An understanding of how volatilities of and correlations between commodity returns and Islamic stock indices change over time including their directions (positive or negative) and size (stronger or weaker) is of crucial importance for both the domestic and international investors with a view to diversifying their portfolios for hedging against unforeseen risks. This paper is the first attempt to add value to the existing literature by empirically testing for the ‘time-varying’ and ‘scale dependent’ correlations between the selected Islamic stock indices of Gulf Cooperation Council (GCC) countries and selected commodities. Particularly, by incorporating scale dependence, it is able to identify unique portfolio diversification opportunities for different set of investors bearing different investment horizons or holding periods. In order to address the research objectives, we have applied the vector error-correction model and several recently introduced appropriate wavelet decomposition techniques such as the Maximum Overlap Discrete Wavelet Transform (MODWT) and Continuous Wavelet Transform (CWT). The data used in this paper are the daily data of three commodities (crude oil, gold and corn) prices and Islamic stock indices from 1 June 2007 until 28 February 2014. Our findings tend to suggest that there is a theoretical relationship between the selected Islamic stock indices and selected commodities (as evidenced in the cointegration tests) and that the Islamic stock indices of Saudi Arabia, Oman and crude oil price are leading the other Islamic stock indices and the commodities (as evidenced in the Vector Error-Correction models). Our analysis based on the application of the recent wavelet technique MODWT indicates mixed results in that in the short run, the crude oil price is leading the other Islamic indices but in the long run, it is the other way around. From the point of view of portfolio diversification benefits, our results tend to suggest that an investor will obtain diversification benefit if his/her investment horizon is below 128 days (as evidenced in the continuous wavelet transform analysis). This result is consistent with the cointegration test that indicates that the diversification benefits for crude oil and the other Islamic indices is minimised in the long run because the variables under review tend to move together toward the same direction. Our analysis based on the recent applications of the wavelet decompositions helps us unveil the portfolio diversification opportunities for the investors with heterogeneous investment horizons or holding stocks over different periods.

Suggested Citation

  • Rithuan, Syahidah Hanis Meor & Abdullah, Ahmad Monir & Masih, Abul Mansur M., 2014. "The Impact of Crude Oil Price on Islamic Stock Indices of Gulf Cooperation Council (GCC) Countries: A Comparative Analysis," MPRA Paper 56989, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:56989
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    References listed on IDEAS

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    Cited by:

    1. Alexakis, Christos & Pappas, Vasileios & Tsikouras, Alexandros, 2017. "Hidden cointegration reveals hidden values in Islamic investments," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 46(C), pages 70-83.
    2. Ghaemi Asl, Mahdi & Adekoya, Oluwasegun Babatunde & Rashidi, Muhammad Mahdi & Ghasemi Doudkanlou, Mohammad & Dolatabadi, Ali, 2022. "Forecast of Bayesian-based dynamic connectedness between oil market and Islamic stock indices of Islamic oil-exporting countries: Application of the cascade-forward backpropagation network," Resources Policy, Elsevier, vol. 77(C).
    3. Sanusi Yakubu Muhammad & Isah Auwal & Bello Abdulmajeed Kumo & Yusuf Fadimah, 2023. "Oil Price and Stock Market Nexus in Nigeria: An Asymmetric Cointegration Based on Non-Linear Ardl Approach," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 7(11), pages 573-591, November.
    4. Gourène, Grakolet Arnold Zamereith & Mendy, Pierre, 2015. "Oil Prices and African Stock Markets Co-movement: A Time and Frequency Analysis," MPRA Paper 75852, University Library of Munich, Germany.

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    More about this item

    Keywords

    Commodity; Islamic Stock Index Returns (ISIR); MODWT; CWT; Diversification; Causality;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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