The dynamics of crude oil price and the real estate market in Saudi Arabia: A Markov-switching approach

Abstract

The volatility evidence of the International crude oil prices has overtime been linked to the dynamics and sector performances of states' economies. By employing the Markov switching regression model over daily time series data from October 3, 2005 to March 29, 2018, this study examines the response of the Saudi Arabia real estate market to the crude oil price dynamics. An empirical observation revealed that there is statistical evidence of significant and positive impact of crude oil price return on the real estate market in the regimes. Am empirical evidence shows that the impact is higher in Regime 2 even as the global factor (proxied by volatility index) is evidently significant. Although the regimes are persistent, the expected regime duration of the stable regime is of the higher quarter. This investigation is statistically significant and robust, especially when OPEC price of crude oil is used in lieu of the Europe Brent price. By a further estimation techniques, it affirms that the model exhibits non-linearity rather than a linear relationship. The estimation result encourages more strict energy policies such as the implementetion of energy diversification policy among others, thus rendering a panacea to Saudi Arabia's energy and the real estate challenges.