Institutions and Return Predictability in Oil-Exporting Countries

FEDS Working Paper No. 2015-014

http://dx.doi.org/10.17016/FEDS.2015.014

31 Pages Posted: 7 Apr 2015

See all articles by Sirio Aramonte

Sirio Aramonte

Bank for International Settlements (BIS)

Mohammad R. Jahan-Parvar

Board of Governors of the Federal Reserve System

Justin Shugarman

Board of Governors of the Federal Reserve System (FRB)

Date Written: February 20, 2015

Abstract

We study whether stock market returns in oil-exporting countries can be predicted by oil price changes, and we investigate the link between predictability and the quality of each country's institutions. Returns are predictable for half the countries we consider, and predictability is stronger when institutional quality is lower. We argue that the relation between predictability and institutional quality reflects the preference of countries with weaker institutions to consume oil windfalls locally rather than smooth out the impact of windfalls by, for instance, investing the proceeds through a sovereign wealth fund.

Keywords: Country studies, Quality of institutions, Return predictability

JEL Classification: G12, O16, O50

Suggested Citation

Aramonte, Sirio and Jahan-Parvar, Mohammad R. and Shugarman, Justin, Institutions and Return Predictability in Oil-Exporting Countries (February 20, 2015). FEDS Working Paper No. 2015-014. Available at SSRN: https://ssrn.com/abstract=2590364 or http://dx.doi.org/10.2139/ssrn.2590364

Sirio Aramonte (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Mohammad R. Jahan-Parvar

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://sites.google.com/site/mrjahan/

Justin Shugarman

Board of Governors of the Federal Reserve System (FRB) ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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