Do Oil Prices Affect Kuwait Sectoral Stock Prices? Non-Linear Cointegration Evidence

Khalid Kisswani and Mohammad Elian

No 1141, Working Papers from Economic Research Forum

Abstract: This paper tests the asymmetric long-run dynamics between oil price changes and Kuwait stock prices at the sectoral level. Our daily data on Brent and West Texas Intermediate (WTI) nominal spot crude oil prices spans from January 3, 2000 to December 9, 2015 for some sectors, and from May 14, 2012 to December 9, 2015 for others. We used a nonlinear cointegration methodology in which the nonlinear autoregressive distributed lags is utilized to allow for estimating asymmetric long- and short-run coefficients in a cointegration framework. The findings show asymmetric long-run effects between oil prices and some Kuwait sectoral stock prices. As for the short run, the findings show an asymmetric effect in case of WTI price measure, but symmetric effect in case of Brent price measure. The paper shows that using nonlinear models contributes to better understanding the long-run relationships, hence serving more in policy-making. Finally, the causality tests show that there is bidirectional causality between the Brent positive oil price shock and the stock prices of the following sectors: Banking, Consumer Goods, Consumer Services, Industrials and Real Estate. On the other hand, they show a unidirectional causality running from the Brent negative oil price shock to the stock prices of the Banking, Consumer Goods, Consumer Services, Industrials and Real Estate sectors. As for the WTI price measure, we find bidirectional causality between the WTI positive oil price shock and the stock prices of the Consumer Services and Industrials sectors, and unidirectional causality from the WTI negative oil price shock to the stock prices of the Consumer Services and Industrials sectors.

Pages: 21 pages
Date: 2017-28-09, Revised 2003
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