Sectoral sensitivity of Oman stock market to oil price movements

This study investigates Omani stock market responses to the decline in oil prices. It examines the effects at both market and sectoral levels, specifically to distinguish the sector reaction from the market reaction as a whole. The period of the study, covering 10 years from 2010-2019, experienced huge swings in oil prices. Using Granger causality and regression analysis, the results support the asymmetric sensitivity of stock market returns to oil price fluctuations. This study also concludes that the Omani stock market and its heterogeneous sectors differ in their responses to oil price fluctuations. Oman stock market is dealing with the drop in oil prices by reducing the dependence of certain sectors on oil revenues which would make them less susceptible to the decline in oil prices. Further studies, employing different methodologies to investigate other GCC stock markets, will increase our understanding of the dynamics between oil price fluctuations and GCC sectoral returns.

Within the same framework, the negative transmission of oil prices to the stock market can be directly and indirectly. The direct effect can be explained by the risk factor and uncertainly that oil prices create in the financial world (Jones and Kaul 1996). The indirect effect is justified by the higher production costs and the lower consumption and production levels resulting from higher oil prices.
Moreover, the impact of oil prices on stock prices is attributed to the uncertainly created which could be driven by demand-side and supply-side factors (Hamilton, 2009a). The change in the oil demand from China and other industrialized economies (demand side) and the failure of global production to increase to meet market demand (supply side) might explain the fluctuations in oil prices. It is found that shocks resulting from demand side such as increase in global demand will positively impact stock markets, while those originating from supply side will negatively impact stock returns (Kilian and Park, 2009).
After discussing the theoretical explanation behind the possible linkage between oil prices and stock markets, we will proceed by briefly discussing some empirical studies related to this topic.
A strand of studies examines the interconnection between oil price fluctuations and macroeconomic indicators like GDP, inflation rates, interest rates, unemployment, and industrial production. Moreover, some researchers have used the return on the stock market as the macroeconomic indicator (Jones & Kaul, 1996;Sadorsky, 1999;Afana & El Agha, 2019;Haung et al., 1996). While majority of studies have focused on oil importing countries, fewer studies have addressed oil exporting countries or new and emerging economies. Moreover, previous studies fail to discern between oil importing and oil exporting countries.
The impact of oil prices on stock markets was supported by many studies. The relationship is found to be positive in some oil exporting countries (Bashar, 2006;Arouri and Rault, 2012), negative in oil importing countries (Jones & Kaul, 1996;Killian & Park, 2009;Papapetrou, 2001: Bashe & Sadorsky, 2006, and neutral in some studies (Al-Fayoumi, 2009). The absence of any significant impact of oil price changes on stock market returns suggest that some economies succeeded in being less vulnerable to oil price changes, so that these effects are no longer transmitted to the stock market. For example, Filis et al. (2011) and Filis and Chatziantoniou (2014) found that although oil price innovations significantly affect inflation rates, the monetary authorities are stressing on inflation stability. Thus, some countries, via counter-inflation monetary policy, are preventing the inflationary pressures created by oil price, which could explain the neutral relationship. Nevertheless, some studies show that the transmission relationship between oil price changes and the economy depends on the direction of price changes and that this relationship is asymmetric (Lee and Chiou 2011;Arouri and Nguyen 2010;Miller and Ratti 2009;Nandha and Brooks 2009). Their findings also suggest that stock markets are more sensitive to positive oil price changes, with an opposite relationship in net oil exporting countries.
In summary, the response of the stock market is affected by the relative importance of positive and negative impacts in any given country.
Using vector autoregression, Sadorsky (1999) studied the impact of oil price on stock markets in the United States, which is considered as a major oil importer and his finding supported the presence of a negative relationship. Four years later, Sadorsky (2003) revealed that the negative impact of oil prices on technology stock prices is an indirect relationship driven by the impact of oil prices on inflation rates. Sadorky (2001) conducted a similar study targeting the Canadian oil and gas sector and his results support the presence of a positive relationship between oil prices and the oil equity index.
A group of many researchers studied GCCs to better understand these economies given that they are significant participants in the oil market. Understanding the impact of oil price variations on the economic performance of those countries is important for policymakers, regulators, and investors (Al-Khazali et al., 2006;Hammoudeh & Aleisa, 2004;Bley and Chen, 2006). Although this topic was extensively studied, the type of the reaction of the stock market to the oil price change is still uncovered. On the one hand, Hammoudeh and Choi (2006) found no predictive impact of oil prices on any GCC market in the short run.
On the other hand, some studies found that oil prices have a direct and significant impact on GCC market (Maghayereh and Al-Kandari, 2007;Awwad, 2018). In GCC, Arouri et al (2011) investigated the same relationship between 2005 and 2010 and they found that oil prices and stock markets are positively intertwined. An increase in oil price is positively transmitted to the stock market. The same positive relationship is confirmed by Dutta et al. (2017) in Qatar, Kuwait, Saudia Arabia, and UAE.
However, Arouri and Fouquau (2009) tackled the sensitivity of GCC stock markets to oil prices using the non-parametric method. Their results support the presence of asymmetric impacts of oil prices on stock market returns in Oman, UAE and Qatar. Arouri and Rault (2012) investigated the responses of GCC stock markets to oil price fluctuations. The result supports the presence of a causal and bidirectional relationship between oil prices and stock markets in Saudia Arabia and a unidirectional relationship in other GCC countries. More specifically, in GCC countries, oil price fluctuations Granger cause stock market returns (Hamdan, R.K., and Hamdan, A.M., 2020). However, the impact of oil price fluctuations differs in each GCC country . Similarly, Cheikh et al. (2018) found a new evidence supporting the nonlinear relationship in GCC between 2004 and 2015. They found that stock markets are more affected by negative changes of oil prices than by positive changes in oil prices.  extended the analysis by assessing the relationship between oil price changes and stock market returns at the country and industry levels. Their findings show that stock markets, except the Kuwait stock market, have a significant exposure to oil price shocks. However, this study fails to consider stock market and oil price returns (Kassim, E. and El Ukosh, A, 2020).
Similarly, Louis and Balli (2014) explored the linkage between oil prices and the stock markets in GCC per country and per sector. Interestingly, they found that investments in other sectors, such as banks in Kuwait, hotels and tourism in Bahrain, and industry in Oman, are more profitable than investments in the crude oil market, while investments in the UAE industry sector are similar to investment in the crude oil market. They conclude that a portfolio made of these stocks would be more attractive than other GCC portfolios with a similar level of risk.
From the existing research, it can be concluded that previous studies have explored the linkage between oil prices and the stock market. However, majority of the studies have focused on this relationship in oil importing and developed markets such as USA, UK and Europe, while emerging markets, net oil exporting countries, and new stock markets such as GCC stock markets are not well explored. Thus, the objective of this study is to fill the gap of already existing literature by exploring this relationship in one GCC market from the sectoral perspective. Studying the impact on the whole stock market masks the response of its heterogeneous sectoral components. Each industry is characterized by a varying degree of its dependence on oil, which suggests that each sector might react differently to oil price shocks. Faff and Brailsford (1999) explored the sectoral reactions to oil price fluctuations in Australia and concluded that the impact of oil prices volatility on stock markets is positive in energy industry and negative in paper, packaging and transportation industries. El-Sharif et al. (2005) revealed that soaring oil prices have a significant impact on UK's oil and gas sector equity index. The conclusion that the relationship between oil price fluctuations and stock market depends on the industry is also supported by Arouri and Nguyen (2010) in Europe. As evidenced by the previous empirical studies, the relationship between oil price fluctuations and stock markets remains contradictory and open to further research.

METHODOLOGY AND DATA
The relatively high oil prices that start in 2003 have strengthened the macroeconomic indicators in the GCC countries, leading to an economic boom. However, recent declining oil prices, due to a reduction in demand resulting from factors such as slower economic growth in China, have changed this situation. Thus, the GCC countries face the urgency to attract foreign investors, diversify and liberalize their economies, develop the non-oil private sector, and increase the market efficiency by adopting several economic reforms. Examples of such reforms are the Saudi 2010 Ministry of Planning and Economics Plan designed to diversify its economic base and enhance the performance of non-oil sectors. Currently, the sensitivity of GCC economies, especially their financial markets to the low oil prices, remains unclear. Thus, this study aims to analyse and evaluate the effect of low oil prices on the overall stock market in Oman and on each sector operated in this market to better understand the extent of the reduced dependence on oil revenues. We cover one GCC countries which is Oman. The methodology adopted in this study is similar to Arouri's methodology (2011). Equation 1 below displays the multifactor model used in this study .
Where Rit is defined as the monthly stock return in sectori, oilt is the oil price; and GCCMt 0 is the return on the market.

Asymmetric effect of oil price fluctuations
The existence of a nonlinear effect of oil price swings on economy is supported by many researchers such as Zhang (2008) and Hamilton (2003). More specifically, in net oil importing countries, stock returns are more affected by positive oil price fluctuations than by negative oil price fluctuations. However, the reverse relationship takes place in net oil exporting countries such as Oman, whose markets are more affected by decreasing oil prices. To explore the asymmetric impact of oil price fluctuations on the stock market return and following Arouri et al. (2011), the period of the study is divided into two time series based on the direction of oil price variations (negative and positive) using the functions below: where Loil0 is the initial oil price and: Then, we estimate the following model: = + + × + + − × − + × 0 + (4) where Rit is the monthly stock return in sectori, Oilt + is the positive oil price, and Oiltis the negative oil price, OmanMt 0 is the market return.

Causality test
A Granger causality test is used to test the presence of a causal relationship between oil price changes and the Omani stock market return. This method is applied in many empirical studies and it helps to forecast the dynamics between oil prices and sectoral stock market performance (Zhang & Cao, 2014). Moreover, and to investigate the impact of oil price changes on sectoral returns, we run the regression for all oil price fluctuations and for the increase and decrease price fluctuations.

Data and Data analysis
Monthly data were used to better capture the properties of the time series for 10 years, 2010-2019. This period is marked by dramatic swings in oil prices. The latter recorded a high level at the beginning of this period, with a sharp drop at the end of this period. Data for Oman's sectoral and market returns were obtained from Bloomberg database, whereas crude oil prices data were collected from the West Texas Intermediate (WTI).

DESCRIPTIVE ANALYSIS
Table (1) reports the descriptive statistics of the sectoral return and the whole stock market return. The correlation between stock return and oil prices is also presented. The Omani stock market has the smallest market capitalization among the GCC countries and is the least diversified. It comprises three sectors, adding to a newly established sector (Islamic financial services), which was excluded from this study. The highest returns were achieved by Industrial sector, while the Financial sector displayed the lowest returns. A positive correlation was obtained between all sectors, including the whole market, and oil prices.

Unit root tests
As a first step and to verify the properties of the series of all our variables, namely sectoral returns, Omani market index return, and oil prices, we use three unit root tests, such as Augmented Dickey Fuller (ADF), Phillips Perron (PP) and Kwiatkowski et al. (1992) (KPSS). More details on applying these tests are found in Arouri et al. (2011). The results in table 2 indicate that the time series are stationary in Oman. The implication of this finding is that we can proceed by running causality and regression without the need for co-integration testing found in Arouri et al. (2011) study. Oman is an oil-exporting country where oil is considered as the main commodity and a key driver of its economic performance. Table 2 Unit Root Tests ADF is the augmented Dickey-Fuller test, PP is Phillips-Perron test and KPSS is the Kwiathowski-Phillips-Schmidt-Shim test. (a) refers to the model with no constant and no trend, (b) refers to the model with a constant but without trend, and (c) refers to the model with a constant and with a trend. *, **, ***, denote rejection the null hypothesis at 10%, 5%, and 1%.

Regression results
As seen in table 4, the Omani stock market and all its sectors, except the Industrial sector, are affected by general oil price changes and by increasing oil price changes. The findings also indicate that all sectors in Oman are highly affected by negative oil price fluctuations. Table 4 Regression of sectorial returns on oil price in Omani market T-Statistic is reported in the top and P-value is reported below in parentheses. *, **, and *** denote significance at 10%, 5% and 1% levels, respectively.

DISCUSSION AND CONCLUSION
GCC's revenues are increasingly dependent on oil, which make the economies of those countries susceptible to oil price fluctuations. Currently, the dramatic fall of oil prices is putting pressures on GCC economies to minimize their reliance on oil, diversify their economies, and expand the non-oil sectors. Nevertheless, GCC countries face these challenges in varying degrees. In the last decade, many countries have developed alternative sources of revenues by investing heavily in other areas such as infrastructure, transportation, and financial markets and by opening their markets to foreign investment. The recent fall of oil prices encourages academics to explore its impact on GCC economies, to predict the outlook of these economies, and to determine the level of success of economic policies intended to decrease the reliance on oil markets. This study examined the impact of oil prices in Oman, one of the six GCC countries. The results show that the Omani stock market, as overall, exhibits asymmetric reactions to oil price fluctuations consistent with Arouri and Fouquau (2011). More specifically, declining oil prices have a larger impact on Omani stock market than increasing oil prices, supporting the findings of Hamilton (2003) and Zhang (2008) of Aa asymmetric impact of oil price fluctuations on economic activities.
By dissecting the impact of oil prices on each sector operating in Omani market, the results found that all the sectors reacted to the negative oil prices but with different magnitudes. Furthermore, there is a statistically significant relationship between the general oil prices and all sectors in Omani market, except the Industrial sector. The result is consistent with Arouri et al. (2011) who found that the characteristics of the industry affects the relationship between oil price swings and market returns. Since the services sector in Oman depends on oil market, a decline in oil prices might have a negative impact on this sector's performance. Thus, consideration is needed to lessen the negative effects of low oil prices on this sector's return.
GCC markets hold promise, and they have succeeded in decreasing their heavy reliance on the oil market in varying degrees. However, governments should play a role in initiating and enacting more regulations to improve the capacity of all sectors to better confront the falling and any future fluctuation in the oil market. Reconsidering government subsidies is one option. In addition, strengthening the private sectors and reducing government control of other sectors may also be beneficial. Further research may include similar studies of other GCC countries and other methodologies could also be employed to further explore the sensitivity of GCC sectoral performance in both the short and long term.