Economics at your fingertips  

Predictability of GCC stock returns: The role of geopolitical risk and crude oil returns

Abdullah Alqahtani, Elie Bouri and Xuan Vinh Vo

Economic Analysis and Policy, 2020, vol. 68, issue C, 239-249

Abstract: Stock return predictability has always been one of the central themes of finance literature, given its crucial implications for investment decisions, risk management, and financial and monetary policymaking. This paper evaluates the in-sample and out-of-sample stock return predictive power of the global and Saudi geopolitical risk indices and crude oil returns in the context of six Gulf Cooperation Council (GCC) countries. Monthly data from February 2007 to December 2019 and the feasible generalized least square (FGLS) estimator for predictive modelling by Westerlund and Narayan (2012, 2015) are used. Global and Saudi GPR indices show weak evidence of in-sample predictability of excess stock returns. However, the out-of-sample forecasts show that only the global geopolitical risk index provides superior prediction in the context of Kuwaiti and Omani stock markets, compared to the historical average benchmark model. Crude oil prices are shown to be a better predictor in most cases, in both in-sample and out-of-sample forecast models The results imply that crude oil returns can be used for active prediction of GCC stock market returns, once econometric issues are accounted for. The findings remain mostly unaffected when excess risk adjusted returns are used.

Keywords: Geopolitical risk; Crude oil prices; stock return predictability; GCC; In-sample; Out-of-sample (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4) Track citations by RSS feed

Downloads: (external link)
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

DOI: 10.1016/j.eap.2020.09.017

Access Statistics for this article

Economic Analysis and Policy is currently edited by Clevo Wilson

More articles in Economic Analysis and Policy from Elsevier
Bibliographic data for series maintained by Catherine Liu ().

Page updated 2021-10-03
Handle: RePEc:eee:ecanpo:v:68:y:2020:i:c:p:239-249