Residual Based Test for Cointegration between Oil Prices and Stock Prices in Saudi Arabia in the Presence of Structural Break

Journal Article

Kalyanaraman, Lakshmi . 2015

مستخلص المنشور

We test for the existence of long-run relationship between oil prices and stock prices in Saudi Arabia. Time series analysis is applied to monthly data from October 2008 to October 2013. Application of Bai-Perron test confirms the existence of at least one structural break in both stock prices and oil prices data. Since both the variables are found to be I(1), both the conventional Johansen cointegration and a residual based test of cointegration test that takes into account for a endogenous break proposed by Gregory and Hansen are applied to examine if oil prices and stock prices are related. Johansen rules out cointegration between oil prices and stock prices. However, the Gregory-Hansen cointegration test shows that oil prices and stock prices have at least one cointegrating vector in the level shift model. The error correction model confirms the presence of both long-run and short-run relationship between oil prices and stock prices. The results of this study have important inputs for decision making for the investors and policy makers of Saudi Arabia.