Abstract
This work reinvestigates the interrelationship between crude oil prices and stock market returns in Saudi Arabia by taking into account volatility spillovers that are exemplified by second-moment effects. Using weekly data from 2001 to 2018 and time-varying causality-in-mean and causality-in-variance tests and taking into account structural breaks, we model each series as an APARCH process to capture any leverage effects in the volatility of returns. Empirical results suggest the existence of a bidirectional causality relationship between stock and oil performance series. While we fail to document significant spillover effects stemming from the stock market to the oil market, we detected substantial spillover effects running from crude oil price changes to stock market returns. We also find evidence in favor of the presence of risk spillovers between crude oil price and stock market. In this context, unexpected loses in the oil market can be predicted by using sudden past declines in the Saudi Arabian stock market and a substantial increase in the oil price seems to have significant predictive power for a rise in the stock market in the future. These results suggest that government policies must take into account risk spillover effects between markets and that investors are better off monitoring crude oil markets in portfolio allocation decisions.