Spillovers between oil and the GCC stock markets: Fresh evidence from a regime-switching approach

Abstract

This study examines the connection between crude oil and the Gulf Cooperation Council (GCC) region stock markets by employing a regime-switching approach. The methodology provides new insights on how the linkage between oil and GCC stock markets may fluctuate in different economic or market regimes, which is crucial for understanding the transmission of oil shocks and tailoring policy responses. The findings indicate that the spillovers between the underlying assets are asymmetric. Specifically, during the turmoil periods, the connectedness is intense among these assets, whereas during tranquil periods, the linkage is moderate. The intense spillovers regime is short-lived, which corroborates the existing literature of a relatively stable oil market. Furthermore, an increase in oil prices can positively contribute to the profits of firms that are heavily dependent on oil, leading to an increase in the linkage between these countries and crude oil. Results have crucial suggestions for investors and decision-makers in the GCC region.