Exploring the role of oil shocks on the financial stability of Gulf Cooperation Council countries

Abstract

This study explores the relationship and connectedness between oil returns and financial stresses in six Gulf Cooperation Council (GCC) countries using daily data from September 21, 2006 to May 31, 2019. The Bayesian Graph-based Structural Vector Autoregression (BGSVAR) model is utilised to estimate and analyse the direction of causality. In addition, the spillover approach is utilised to examine connectedness and risk transmission patterns between oil returns and financial stresses in the GCC economies in both time and frequency domains. The empirical analysis of the BGSVAR model shows that oil returns and financial stresses have both a contemporary and temporal relationship, whilst findings from the spillovers analysis show that oil returns tend to act as a net transmitter of spillovers to GCC financial markets in both medium and long-run horizons but a net receiver of spillovers in the short-run.