Oil dependency, political instability and the stock market: A perspective from the Middle East and Africa

Abstract

We examine the time-varying effects of oil price shocks and geopolitical risk on the stock markets of six Middle Eastern and African countries—namely, Egypt, Israel, Saudi Arabia, South Africa, Tunisia, and Turkey. Our analysis, which uses time-varying parameter vector autoregression and monthly data from 2002 to 2023, demonstrates the crucial role played by geopolitical risk and oil price shocks in shaping the stock returns of these countries. Their impact in the period under study is found to vary across countries according to their different economic structures, political conditions, and degrees of reliance on oil. Some countries, such as Egypt and Israel, are more affected by geopolitical events, whereas others, such as Saudi Arabia, are heavily influenced by oil price fluctuations. The diverse responses of the stock markets to these factors emphasizes the need to consider both geopolitical risk and oil price shocks when evaluating stock market performance. Our findings on the heterogeneous effects of oil prices and geopolitical risk across countries and regions can inform country-specific policy responses and investment strategies that are tailored to countries’ unique economic structures and political environments.