Effects of Conditional Oil Volatility on Exchange Rate and Stock Markets Returns

Abstract

Saudi Arabia experienced extreme volatility in oil price booms during a short period due to COVID-19, which traded for 16 days. The oil price boom period has received significant attention as it is essential to a nation’s economic sector. The objective of this study was to examine how changes in oil volatility under specific conditions affect the stock market return indices and exchange rate of Saudi Arabia. The Saudi Arabia capital market was used as the case study, while the average daily exchange rate and stock market were employed as the primary variable. This study covers the period from March 21, 2014, to November 19, 2020. The wavelet methodology was used for data analysis. The study's findings revealed that oil is not a safe haven for the bond market in Saudi Arabia. Similarly, oil-primarily functions as a safe haven for a short period that last for 16 days. The findings revealed that oil price fluctuation has no impact and a safe haven effect on the various deals in the Saudi Arabian capital market. It also suggests that market participants focus on oil price trading as a significant tool for determining the volatility of stock market returns in underdeveloped countries.