Oil volatility shocks and the stock markets of oil-importing MENA economies: A tale from the financial crisis

- ARMAX-GARCH to model conditional mean and variance.
- Examine volatility linkages between oil and stock indices
- Oil transmits its volatility to Jordan after the crisis.
- Foreign investors seem to affect the dynamic of volatility linkages.

The role of oil price volatility in predicting the stock-market volatility of small oil-importing countries that have a substantial number of investors from neighboring oil-exporting countries remains unexplored. To refine our basic understanding of this role, this paper proposes a methodological extension of the recently developed causality-in-variance procedure and considers the case of Lebanon and Jordan. These two heavy importers of oil are interesting in the sense that they are located in a region with a large number of rich oil-exporting countries, so their stock markets are tied to oil-exporters by way of foreign investors. The conditional mean and variance of returns are modeled within an ARMAX-GARCH framework that accommodates three salient features of the data, namely: autocorrelation, day-of-the-week effects, and movements in international markets. For comparison purposes, the stock markets of Morocco and Tunisia are also included in the study. Empirical analyses highlight the dynamic effects of the global financial crisis on the volatility spillovers between oil and the stock markets of oil-importing countries and provide more insights into the seemingly contradictory effects of being oil-importers while having investors from oil-exporting countries. The main results indicate that the volatility spillover is much more apparent from the world oil market to the stock market of Jordan than the other way around, whereas oil volatility is not a good predictor of Lebanese stock market volatility. Finally, policy/practical implications and conclusions for future research are drawn.