Crude oil prices, macroeconomic indicators and the financial sector in jordan: Dynamic causes and responses

Abstract

This study contributes to the literature on the relationship between fundamental economic factors and stock price movements. We evaluate the relationship between domestic and international macroeconomic indicators and financial sector index in a frontier market that is Amman Stock Exchange (ASE) in Jordan. We employed the ARDL bound testing approach and the VECM Granger causality test to examine long and short run relationships and the direction of causality among the variables. Monthly time series data from January 2007 to December 2016 were used to identify the relationships for interest rate (positive), inflation rate (insignificant), money supply (insignificant), industrial production index (insignificant), producer price index (negative), trade balance (insignificant), and crude oil price (negative). Our findings indicate that the deposit interest rate positively influenced the financial sector in the short run and the long run, while the producer price index and global oil price had significant negative impacts on the financial sector. This study contributes actionable insight for policy makers and investors regarding how global and domestic factors have significant impact on the financial index in Jordan. The current study provides several important implications and recommendations for investors, policy makers and the government. For example, the results imply that global oil prices have a significant impact on the financial index in Jordan, which indicates that the ASE is correlated with the global markets and is sensitive to shocks of the global indicators.