Oil, Uncertainty, and the Stock Market: How Geopolitical Risk Shapes an Oil-Dependent Economy

Abstract

Purpose

This study examines the macroeconomic and financial effects of geopolitical risk in Oman. Oman is an oil-dependent economy facing ongoing regional instability. The study explores dynamic links among geopolitical risk, private investment, household savings, and stock market performance.

Methodology

Monthly data from 2004 to 2023 are used for the Geopolitical Risk Index, gross fixed capital formation, private sector deposits, and the Muscat Securities Market index (MSX30). A Vector Autoregressive (VAR) framework captures endogenous interactions and feedback. Unit root tests confirm stationarity. The analysis uses impulse response functions, forecast-error variance decompositions, Granger causality, and CUSUM tests to assess shock transmission, causal links, and model stability.

Findings

Geopolitical risk strongly affects financial variables. Over time, it has a growing impact on private deposits and stock market fluctuations. There is bidirectional causality between savings and equity market performance. This suggests increased precautionary behavior and greater financial sensitivity during periods of uncertainty. Gross fixed capital formation, however, responds little to short-term geopolitical shocks. This implies investment decisions mainly depend on structural and macroeconomic factors.

Conclusion

The findings show that geopolitical risk in Oman mainly acts through financial and behavioral channels. There is little evidence of an immediate decline in investment. This highlights the importance of financial resilience and savings-based stabilization in resource-dependent economies.