The impact of exchange rate, oil price and gold price on the Kuwaiti stock market: a wavelet analysis

Abstract

This paper examines the impact of the exchange rate, oil price and gold price on the Kuwaiti stock market using a wavelet analysis, namely, cross-wavelet coherency and partial cross-wavelet coherency. This method is used to test for nonlinear causality and decompose the data into various time frequencies to better understand various investment horizons. These interactions were examined based on daily observations from 02 January 1996 to 28 September 2017. The findings show a positive relationship between stock market and exchange rate in all frequencies. This relationship is being remarkably weak once the impact of oil price is removed. Besides, the correlation between the stock market and oil price is positive in low-frequency bands and will be reduced after eliminating the effect of the exchange rate. Regarding gold price, there is only a negative short-term relationship with the stock market during crisis periods. In summary, the impact of oil price is indirectly positive on the stock market by leading the movement of the exchange rate.