Long-term Dynamics between Oil Prices and Frontier Equity Markets: A Cointegration Analysis

Abstract

Despite the growing importance of Frontier Markets within the investment management landscape, relatively few studies have focused on them. However, understanding their behaviors and the way they relate to oil prices is of paramount importance for financial market participants. This paper therefore aims to investigate potential long-term relationships between oil prices and a number of frontier stock markets. 14 frontier markets are studied with weekly data covering the period ranging from December 2005 to July 2014. Results indicate that causality exists from oil to stocks for Kazakhstan and Qatar. Interestingly, the causality also runs from stocks to oil in the case of Kazakhstan. For Kazakhstan and Qatar, evidence of positive long-term relationship is found. These findings are important for these countries’ policy makers as it provides insights into how these markets are linked to oil prices. As these findings imply some degree of market predictability, they could also be of interest to asset managers.