Journal of Applied Finance & Banking
Residual Based Test for Cointegration between Oil Prices and Stock Prices in Saudi Arabia in the Presence of Structural Break
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We test for the existence of long-run association between oil prices and stock prices in Saudi Arabia. Time series analysis is applied to monthly data from October 2008 to October 2013. Application of Bai-Perron test confirms the existence of at least one structural break in both stock prices and oil prices data. Since both data series are I(1), conventional Johansen test and Gregory-Hansen test that takes into consideration one endogenous break are applied to examine if oil prices and stock prices are related. Johansen test rules out cointegration between oil prices and stock prices. However, Gregory-Hansen test detects the presence of long-run association in the level shift model. The error correction model confirms the presence of long-run and short-run association between oil prices and stock prices. The study offers important inputs for decision-making for investors and policy makers in Saudi Arabia.
ISSN: 1792-6599 (Online)