African Journal of
Business Management

  • Abbreviation: Afr. J. Bus. Manage.
  • Language: English
  • ISSN: 1993-8233
  • DOI: 10.5897/AJBM
  • Start Year: 2007
  • Published Articles: 4131

Full Length Research Paper

Interdependence between GCC stock market and oil prices and portfolio management strategies under structural breaks

Nizar Harrathi
  • Nizar Harrathi
  • Department of Economics, College of Business Administration, King Saud University, P.O. Box 1115 Riyadh 11587, Saudi Arabia.
  • Google Scholar
Ahmed Almohaimeed
  • Ahmed Almohaimeed
  • Department of Economics, College of Business Administration, King Saud University, P.O. Box 1115 Riyadh 11587, Saudi Arabia.
  • Google Scholar


  •  Received: 19 September 2013
  •  Accepted: 09 March 2015
  •  Published: 14 March 2015

Abstract

This paper empirically investigates the interdependence between GCC stock market and oil price by considering structural breaks in conditional volatility. The univariate and multivariate GARCH models are extended by including structural breaks which are determined endogenously by using ICSS algorithm proposed by Inclan and Tiao. Empirical results indicate that the inclusion of structural breaks in the model substantially reduces the volatility persistence and the estimated half-life of shocks. Hence, the conditional volatility of oil price and stock market are more affected by their own shocks and volatility when structural breaks are neglected. Likewise, our results are conclusive on conditional dependency between GCC stock market and oil price revealing that the volatility shifts reduce the shocks and volatility spillover effects. For the portfolio management, the empirical results show evidence of sensitivity of the optimal weight and hedge ratios to structural breaks in conditional volatility.

 

Key words: GCC stock market, oil price, dependency, multivariate GARCH, structural breaks, ICSS algorithm, portfolio implications.