Oil subsidy removal and spillovers between crude oil and stock markets: empirical study from GCC countries

Abstract

Purpose: This study examines return spillovers between the Gulf Cooperation Council (GCC) equity markets and key international indices, including Brent crude oil, gold, the US dollar index (DXY), US Treasury bonds (T-bonds) and the CBOE crude oil volatility index (OVX), both before and after the removal of fuel subsidies in the GCC. Design/methodology/approach: We employed the time-varying parameter vector autoregression model of Antonakakis et al. (2020), which captures evolving covariance structures without relying on fixed-parameter rolling windows, similar to Diebold and Yilmaz’s (2012, 2014) spillover index method. Additionally, we use an unrestricted VAR-based Granger non-causality test to examine the relationships among GCC stocks, oil prices and volatility across the subsidy reform period. Findings: The results reveal heterogeneity in oil–stock price interactions, with UAE markets exhibiting bidirectional causality both before and after subsidy removal, whereas Saudi Arabia’s stock prices are related only to oil prices prior to the reforms. Oil volatility consistently impacts all GCC markets. Connectedness analysis identifies gold and the DXY as net receivers, confirming their safe haven roles, while interest rates and OVX serve as persistent net transmitters. The post-reform return spillover dynamics shift, with the UAE and Qatar equities, interest rates and OVX emerging as key net transmitters. Originality/value: This is the first empirical study on the impact of GCC subsidy removal on oil–stock market interconnectedness that offers valuable insights for investors and policymakers. This underscores the importance of adjusting sovereign wealth fund allocations toward low-carbon, oil-uncorrelated assets, integrating oil volatility into macroprudential frameworks and leveraging the fiscal space for sustainable development without compromising financial stability.