OIL PRICE SHOCKS AND STOCK PRICE INFORMATIVENESS: EVIDENCE FROM GCC FIRMS

Abstract

Fluctuations in international prices of crude oil have had a profoundly impact the economies countries exporting oil, particularly those in the Gulf Cooperation Council (GCC). The countries belonging to the GCC produce 20% of the world's oil, export 36%, and hold 47% of the world's petroleum reserves. Therefore, any abrupt oil price change directly affects these exporting countries across various dimensions, including their production processes. This impact is felt through effects on inflation, employment, economic recession, and even the stability or growth of regimes. Consequently, the volatility in oil prices is a significant factor in understanding the dynamics of stock markets. Although, there is a significant interest from investors on the crude oil price uncertainty impact on stock prices, no conclusions have been drawn on the relationship between the uncertainty related to oil prices and stock prices. This paper adds to the literature that studies the market reactions to oil price shocks by examining the impact of oil prices volatility on stock price informativeness. Using a sample of firms from the Gulf Corporation Council GCC members (i.e., United Arab Emirates, Kingdom of Bahrain, Kingdom of Saudi Arabia, Sultanate of Oman, State of Qatar, and State of Kuwait) along the period from 2006 to 2021, we document a negative association between oil price uncertainty and the information content of stock price. We also show an asymmetric effect of oil price shocks on stock price informativeness. Indeed, we report a negative (positive) association between oil price uncertainty and positive (negative) oil price shocks. We also show that supply (demand) shocks decrease (increase) stock price informativeness. Our results are robust to sensitivity tests and endogeneity considerations.