Oil Price Shocks and Stock Market Responses: Evidence from Saudi Arabia and Spain

Abstract

This research examines the time effect of oil price volatilities on the stock market performance in Saudi Arabia and Spain, which is a net oil exporter and importer, respectively. The overall data of January 2014 to June 2024 were analyzed with the autoregressive distributed lag (ARDL) model to establish short and long-term effects. The results indicate a stable positive relationship between oil prices and stock returns in Saudi Arabia, due to the high reliance of the economy to oil revenues. Spain showed a less consistent and more fluctuating connection that was a testimony to its diversified industrial structure and refined export capacity of oil. Saudi Arabia’s stock market took a negative turn amidst the COVID-19 pandemic in response to the increase in oil prices, as increased uncertainty and investor distrust were witnessed, while such an increase on Spain’s market took a positive shift, as the increase in oil prices is an indicator of recovery of global demand. Volatility was generally low in pre-pandemic conditions but intensified during the crisis, especially in Spain. The results highlight the asymmetric and time-varying effects of oil price shocks on exporters and importers. These findings provide useful insights for investors and policymakers seeking to manage oil-induced risks and design strategies for financial stability under both normal and crisis conditions.