The Sensitivity of GCC Firms’ Stock Returns to Exchange Rate, Interest Rate, and Oil Price Volatility

16 Pages Posted: 4 Jun 2020

See all articles by Marim Alenezi

Marim Alenezi

affiliation not provided to SSRN

Dr. Ahmad Alqatan

Portsmouth Business school

Obby Phiri

University of Westminster

Date Written: May 8, 2020

Abstract

This study seeks to investigate the sensitivity of stock returns to exchange rate, interest rate and oil price volatility in the Gulf Cooperation Council (GCC) countries. It employs both the multivariate ordinary least square (OLS) regression and the exponential generalized autoregressive conditional heteroscedastic in mean (EGARCH-M) models to analyse the data collected from Bloomberg and DataStream on the GCC countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates) for the period January 2007 to June 2012. The study shows that stock returns in GCC countries are influenced by the exchange rate risk, interest rate risk and oil price risk. However, the exposure is highest for exchange rate risk and lowest for interest rate risk. While the effects of these risks were mixed, overall, exchange rate risk and oil price risk showed a positive and significant relationship as compared to the interest rate risk that showed a negative significant effect on firm values. The level of the effect of these risks also differed from country to country. Further, foreign operations and firm size had a significant influence on the extent of the firms’ exposure to all three risks. The study findings suggest that the volatility of stock returns affected by changes in the risk factors could indicate non-prioritisation of risk management by firms. This has implications in terms of consideration of the long-term exposure of firms to these three risks and thus, the need for effective risk management strategies.

Keywords: GCC Countries, Exchange Rates, Interest Rates, Oil Price Risk, Stock Returns

JEL Classification: G10, C32

Suggested Citation

Alenezi, Marim and Alqatan, Ahmad and Phiri, Obby, The Sensitivity of GCC Firms’ Stock Returns to Exchange Rate, Interest Rate, and Oil Price Volatility (May 8, 2020). Available at SSRN: https://ssrn.com/abstract=3596123 or http://dx.doi.org/10.2139/ssrn.3596123

Marim Alenezi

affiliation not provided to SSRN

Ahmad Alqatan (Contact Author)

Portsmouth Business school ( email )

Portsmouth, PO1 3DE
United Kingdom

Obby Phiri

University of Westminster ( email )

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