Dynamic relationship among the bank stability, oil, and gold prices: Evidence from the Islamic banks operating in the Gulf Cooperation Council countries

Abstract

This study uses quarterly time series data to investigate the relationship between oil and gold prices, and the financial stability of Islamic banks operating in the Gulf Cooperation Council countries for the period of 2005Q1 to 2018Q1. For this purpose, first it uses Johansen cointegration and VECM methodologies, and then it employs the newly-developed Bayer-Hanck, Gregory-Hansen, Toda-Yamamato, and DOLS methodologies to test the robustness of the findings. Results reveal a cointegrating relationship and equilibrium-correcting mechanism between the two commodities prices and the bank stability. Both commodities prices have positive effects on bank stability in the short run. However, oil price has a positive effect in the long run, while gold price has a negative effect in the long run. The causality results confirm unidirectional causality from oil and gold prices to bank stability in the short run, and oil price to bank stability in the long run.