The oil prices and MENA equity markets: evidence from frequency and nonparametric granger causality tests

Abstract

In this paper, we study the dynamical relationship between oil prices and the MENA equity markets. We use the frequency and nonparametric Granger causality tests in order to distinguish between permanent and transitory shocks and incorporate the nonlinear bi-directional relationship between the variables. Our empirical results provide evidence that oil prices have a significant and time-varying impact on the MENA equity markets. More interestingly, the frequency test indicates that the oil price Granger causes most of the MENA equity markets at most used frequencies, except for Egypt and Morocco. Within the GCC markets group, the results show that markets differ in their response to oil prices and show that Oman and Bahrain are found relatively to be less sensitive to oil price changes. Extending the frequencies from 1 to 3, the test statistics are significant for up to 4.5 months. Our results should provide new insights to investors and asset managers whose investment decisions depend greatly on the dynamical relationship between oil prices and equity markets in the MENA region.