Modeling Stock Market Volatility in Oil-Dependent Arab Economies: Insights from GARCH-MIDAS Analysis

Abstract

This study employs the GARCH-MIDAS model to estimate the volatility of stock returns in selected Arab countries—Jordan, Iraq, Saudi Arabia, Kuwait, Egypt, Oman, and Qatar—over the period from 2010 to mid-2024, incorporating oil prices as an external regressor to capture macroeconomic influences. The model distinguishes short-term volatility from long-term components, providing insights into the varying sensitivity of stock market volatility to oil price fluctuations across these countries. The findings indicate that countries with economies heavily reliant on oil exports, such as Iraq, Saudi Arabia, and Kuwait, exhibit high sensitivity to oil price changes, resulting in significant volatility. In contrast, countries like Jordan, Oman, and Qatar demonstrate moderate sensitivity due to their economic diversification efforts, while Egypt shows the least sensitivity, reflecting its more diversified economic base. The results underscore the importance of oil prices as a key determinant of stock market volatility in the Arab region, with economic diversification serving as a potential buffer against external shocks. These findings have important implications for policymakers and investors, who must consider both global oil market dynamics and domestic economic structures when assessing risks and opportunities in these markets. Future research could explore sectoral sensitivity to oil prices, the role of other commodities, and the impact of geopolitical risks on stock market volatility.