Effect of Oil Price on Kuwait Stock Market Index - Dissertation Example

Effect of Oil Price on Kuwait Stock Market Index Abstract This proposal is an attempt to assess the possibility of effects of oil prices on the stock market index and it intends to establish all the links between the two values. The research will establish the different causes of rise or drop of the stock market index in Kuwait and relate the findings with the oil prices at different particular situations. The research will assess the various issues that determine the direct effect of changes in oil prices in the Kuwait and compare it with others countries that depend oil for establishment of their economies. The research will collect information from different world stock market and subject it to an analysis that will produce through different tools of analysis. After the analysis of the findings, the research will present objective recommendation on means of stabilising the index to avoid negative impact of loses of investment. Introduction Problem Statement In the past, the performance of the stock market of Kuwait has been influenced by different circumstances, which have resulted from the flow of oil dollar into the country. The amount of money that flow into the country have a direct influence on the Kuwait’s Stock Market because it influences the accessibility to various individuals who are likely to direct it to buying shares. When there is little money is flowing into Kuwait because the prices of oil are low, there is a possibility that people are likely to withdraw their money from buying shares from the stock market. Sometimes when the prices are high and there is a lot of money within the region, the performance of the stock market index of Kuwait rise but on the other hand, poor oil prices have produced the exact opposite results as the high prices. This study will evaluate ways to prevent poor performance of the stock market of Kuwait and suggest some methods to moderate the different circumstances of the economy. Research Questions The research will target to answer the following question; How do the oil prices affect the stock market index of Kuwait? What measures are in place to regulate the fluctuation of Kuwait stock market index? Research Hypotheses In order to help in developing the tools for collecting data in this research, the research will have hypotheses that will form the basis of inquiry. In this research, there will be two hypotheses; null hypothesis, which will be that Kuwait stock market index, is not affected by change in oil prices and the alternate hypothesis will be that the Kuwait Stock market index is heavily affected by change in oil prices. The Scope of the research The research will be restricted to Kuwait stock market index but to enable a comparison, the research will review the literature of the some previous researches in other oil producing countries’ stock markets indices. The research will rely on that information from different research to come up with an objective view of the idea of the influence of oil prices on the Kuwait Stock Market. Research Objective To establish the relationship between the trend of oil prices and those of Kuwait stock market indices Significance of Study The research will be used to inform the factors that cause change in indices in the stock market and will be used to make recommendations on the various things that the government can implement so that they can prevent losses in the stock market. The findings of this research will be important to the investors who would like to invest or who have invested in the Kuwait Stock Markets because it will give them a means to predict the indices at different times of the year. The research will be important to different banking institutions because they will be able to understand the various effects of rending money to their customers so that they can ensure ease of repayments. Literature Review In any country, the fact of presence or absence of oil will always have an effect on the lives of the people because there are different values that people cannot overlook in the establishing of an economy of the country. Oil in many countries in the world is the idea behind industrialization and development of transport systems, which are important aspects of life of the lives of the people. For this reason, oil in any economy has a crucial role because it influences the productivity of the different companies and organisations greatly, either in direct or indirect ways. This essentially means that every country in the world depends on oil as a source of energy to that enhances their production and growth in different perspectives because its prices affects the amount of products a company can have. The analysis of the importance of change in oil prices on the stock market of any country is possible because stock markets depend on the industrialisation and various factors that influence the people. The research will focus on the Kuwait Stock Market Indices and it will seek to establish the relationships that exist between the two factors of the economy (Arouri, Jawadi, and Nguyen, 137). Kuwait as a producer of oil, industries in the country have ease of access of the product because it is availed to them through other refinery companies that operate within the country. However, the issue comes in when prices rise or fall because it influences the home and foreign companies. This happens because the output of the an industry is dependent on the amount of the input that it uses in production of the company, when the value of the input is high, the output becomes low and when the input is low, it is likely to increase the profit margin of the country. This happens because productivity of a company depends on the inputs a company could have on the investment that they want to establish. Research about the influence of oil prices on the productivity of an organisation show that in United States (US), changes in oil prices in the country have direct influence of the Gross Domestic Product (GDP) in the country because the affected industry influence many others. The relationship between the oil prices and the output of an industry in a certain country and its spending on oil is an asymmetrical relationship that means that the GDP is always affected (Arouri, Jawadi, and Nguyen, 134). In an evaluation of the effects of oil prices on the stock markets of various countries, the relationship between oil prices and fluctuations of indices have indicated a relationships. However, different countries’ stock markets have responded in different ways with some countries like US and Canada showing a normal reaction but that of UK and Japan indicating over exaggerated reaction to the change of prices. However, the bottom line is that stock market indices change when oil prices in the same country change, whether it is to the positive or to the negative (United Nations, 62-67). Some countries use the information of the research on the predictability of stock market performance in different situations of oil prices changes. These results show that even in Kuwait Stock Market, there are possibilities of establishing a defined relationship between the performances of the two entities. However, it is also considerable to note that some countries’ stock market do not show any significant changes when there are fluctuation of oil prices in the country (United Nations, 62). A finance study reports on effects of oil price shows that there is a significant relationship between the oil prices and performance of stock market reports. An investigation into the effects of relative prices variability on the outcome of the stock market have indicated some relationships which is to show that oil prices are likely to influence the performance of the stock market indices. In the period between 2004 and 2005 when oil prices were on their high prices, the performance of the stock market of the Kuwait was at its high most, although some scholars argue that the relationship between oil prices and the stock market performance is overemphasised (Azar, and Basmajian 35-53). Analysis of different literature materials indicate that although some scholars have emphasised on the influence of oil prices on the stock market indices, there are no direct links between the oil prices and the subsequent changes in indices of the stock market. This implies that although it could happen that changes in oil prices could affect the indices of the stock market, it does so in very indirect ways that because the effects do not come directly from the oil but from the production activities of industries. For example, other researchers have indicated that production affect the stock market because if the input to output ratio is low, the money available to invest in the stock market is lower and it implies that the productivity is high. On the other hand, if the input to the output ratio is high the productivity and profitability of the companies is high and therefore, investors have high returns to invest in the stock or other ventures in the economy are high (International Monetary Fund, 8). The Kuwait Stock Market Indices vary and could be influenced by the productivity of the industries in the country but it has not direct links with the changes in the oil prices that happen in different times of progress of the economy. The factors that affect the stock market idiocies are major and easily identifiable because they have a direct increase in the productivity of the company that has its investment in the stock market. Through their ventures that may include, political influence on the company, acquisition of other organisations to do business together among other factors, organisations that have invested in a stock market may influence the indices of the said market. However, even though the prices of oil do not have impacts of the indices of stock markets, as an important commodity in the world, it contributes to the productivity of companies that consequently affect the indices. In Kuwait, oil prices relate to its contribution to the export revenue and the government income which is attributable to the because sale of the commodity to local people and export to the different countries changes with change in prices (International Monetary Fund 7-9). Research Methodology Research data will be collected using primary and secondary method to ensure that enough information is available to make the comparison of the two variables. This research will carry out the analysis of empirical statistical data and it will focus on using regressions tools to analyse the relationship between the oil prices and Kuwait stock market indices. Use of linear and non-linear equations will be implemented to determine the different relationships between the two variables in this research, which will be used to predict the performance of one at different level of change of the other. Rationale The method of data collection suggested in this research is the use of primary and secondary because it will lead obtaining of data that will be very important in the making recommendations about the relationships between the oil prices and Kuwait Stock Market Indices. In order to obtain information that is reliable and that which can be used in formulating a theory of relationships, a door-to-door interview will be applicable to the reach out the different stock market analysts who could give information that can be important in analysis. This method will be used because of the following reasons Increase the chances of response for participants To provide more representative sample of the responds However, the accuracy of the report of the data obtained and the analysis of the findings of the research will be dependent on some factors that may include; Accuracy of the tools of data collection and analysis The perceptions of the respondents which can influence the answers they give in the interviews The competence of the analysts of the data obtained Theories obtained from this data will be as correct as the information that is obtained from the analysis and presentation of the findings. Work Cited Arouri, Mohamed, Jawadi, Fredj and Nguyen, Duc. The Dynamics of Emerging Stock Markets: Empirical Assessments and Implications. Heidelberg: Physica, 2010. Print. Azar, Samih Antoine and Basmajian, Loucine. Oil Prices and the Kuwaiti and the Saudi Stock Markets. EconJournals, 2013. International Monetary Fund. Kuwait: 2006 Article IV Consultation - Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Kuwait, 2006. United Nations. Survey of Economic and Social Developments in the Escwa Region 2000-2001: Summary. New York: United Nations, 2001. Print. Read More