Oil Volatility Spillover on MENA Stock Markets: a DCC-GARCH Approach and Portfolio Analysis

  • Houssem Belghouthi
  • Hassan GUENICHI
Keywords: oil volatility, stock return, oil-importing countries, oil-exporting countries, DCC-GARCH

Abstract

This study examines the effect of oil volatility on MENA stock market return. We select four oil importer countries (Egypt, Lebanon, Morocco, and Tunisia) and four oil exporter countries (Oman, EAU, Qatar, and Saudi Arabia). The time horizon of the study is from January 2014 to August 2021. We use in the first step a univariate Threshold-GARCH (1,1) by employing the calculated oil volatility as an exogenous variable in the mean and variance equation of stock returns. In the second step, we employ a multivariate DCC-GARCH to compute the dynamic conditional correlation between oil and the stock market, the optimal portfolio and Hedge effectiveness index. The results indicate that oil volatility has a weak influence on stock market returns but has a very significant effect on stock market volatility for oil-importing (negative) and exporting (positive) countries. We also discover a strong correlation between the oil market and the stock market of oil-exporting countries. In addition, investing in oil assets is more efficient in terms of minimizing portfolio risk.
Published
2022-05-27
Section
Articles