Regime-Specific Spillover Effects Between Financial Stress, GCC Stock Markets, Brent Crude Oil, and the Gold Market

The purpose of this paper is to empirically investigate the volatility spillover between financial stress, the Gulf Cooperation Council (GCC) stock markets, and oil and gold markets in the presence of state (regime) dynamics. We first use the Dynamic Conditional Correlation (DCC)-GARCH model in order to study the correlation between variables. Second, the authors use a continuous wavelet decomposition technique so as to examine the interactions between financial stress, oil and GCC stock, and gold markets. Finally, the authors examine the spillover effects by estimating the Baba-Engle-Kraft-Kroner (BEKK)-GARCH model. The findings indicate various patterns of spillover between GCC financial stress index and oil, gold, and GCC stock market returns in high- and low-volatility regimes, especially during the COVID-19 pandemic. The wavelet coherency results indicate a substantial co-movement between oil and GCC financial stress and between GCC financial stress and GCC stock markets in the periods of high volatility. BEKK-GARCH model outcomes confirm this relation and report the noteworthy bi-directional transmission of volatility between GCC financial stress and oil market for some countries (see Oman, Saudi Arabia, and UAE in the bearish state and Bahrain and Saudi Arabia under bullish state) and between oil market shocks and the GCC stock market returns, chiefly in the turmoil period. Thus, these results are important for investors aiming at managing and reducing portfolio risk. These empirical findings are of significant importance in the development of effective allocation strategies to mitigate financial stress (FSIs) prevalent in the Gulf Cooperation Council (GCC) region. Moreover, they hold crucial implications for portfolio diversification, risk management, and policy formulation by shedding light on the interdependencies among various asset classes and financial markets across different market conditions.