Relationship between different sources of geopolitical risks and stock markets in the GCC region: a dynamic correlation analysis

Abstract

PurposeThe findings would help in designing useful and relevant hedging strategies against geopolitical risks (GPRs), which are rampant in the Gulf Cooperation Council (GCC) region.Design/methodology/approachThis study focuses on the regional and global costs of GPRs for businesses in the Gulf region.FindingsThe results of the analysis show that the time-varying conditional correlation between the stock returns of the GCC countries and the Saudi Arabian geopolitical risk is consistently negative, suggesting that the Saudi Arabian geopolitical risk hurts the GCC stock markets, thus underscoring the importance of studying regional GPRs.Originality/valueThe contribution of this paper is twofold: First, it uses a newly geopolitical risk index that includes recent geopolitical events not included in the Caldara and Iacoviello (2018) index. In addition to war threats and acts, terrorist threats and acts and nuclear threats, the authors consider global trade tensions (GTTs), Saudi Arabia's geopolitical risk and OPEC news mainly related to OPEC oil production levels. Second, it assesses whether Saudi Arabia, which is the largest economy in the region and the main global oil exporter, is really a risk exporter to the rest of the GCC countries.