Impact of oil price uncertainty on Middle East and African stock markets. (15th March 2017)

• Record Type: Journal Article
• Authors: Dutta, Anupam; Nikkinen, Jussi; Rothovius, Timo
• Is Part Of: Energy. Volume 123(2017)
• Page Start: 189
• Page End: 197
• Publication Date: 2017-03-15
• Subjects: Oil price uncertainty -- VIX -- OVX -- Middle East -- Africa -- GARCH-jump model; Power resources -- Periodicals; Power (Mechanics) -- Periodicals; Energy consumption -- Periodicals; 333.7905
• DOI: 10.1016/j.energy.2017.01.126
• Languages: English
• ISSNs: 0360-5442

Abstract

Abstract: This paper investigates whether the implied crude oil volatility index (OVX), a forward-looking measure of oil market uncertainty published by Chicago Board Options Exchange (CBOE), impacts the realized volatility of Middle East and African stock markets. Using an extended version of the GARCH model, we show that the oil market uncertainty has substantial effects on the realized volatility of most of the markets under study. Our findings also reveal that, even after controlling for the effect of the implied volatility index of S & P 500 (VIX), the impact of the OVX on the Middle East and African equity markets still holds for almost half of the markets considered. Additionally, the application of the GARCH-jump model shows that stock returns of majority of the sampled markets are sensitive to the fluctuations occurring in the implied oil volatility index and that time-varying jumps do exist in the stock returns. Thus, the market participants' anticipation of the future oil market uncertainty is an important factor explaining the returns and volatilities of the Middle East and African equity markets. Highlights: We investigate the effect of OVX on Middle East and African equity markets. Modified GARCH (1, 1) and jump models have been estimated. OVX impacts both the mean and volatility of stock returns. Jumps exist in stock returns and they are time-varying.