Dynamic Correlation and Volatility Spillovers Between Oil Prices and the Bahrain Stock Market

This study examines whether volatility in Brent crude oil prices spills over to the Bahrain Stock Market Index (BSMI), and whether that spillover differs by regime, over 2865 trading days from 25 May 2010 to 28 February 2025. Bahrain is a distinctive case among Gulf Cooperation Council (GCC) economies in that its stock exchange has been dominated historically by the banking and financial services sector and that Bahrain’s equity valuation is exposed to crude oil price uncertainty mainly through the intermediate role of financial institutions and through fiscal transmission mechanisms rather than through direct sectoral linkage. An integrated multivariate GARCH framework combining AR (1)-GJR-GARCH (1,1), DCC-GARCH (1,1), and full BEKK-GARCH (1,1) is used together with the Diebold–Yilmaz (DY) connectedness methodology to examine volatility asymmetry, time-varying conditional correlations, directional volatility transmission, and regime-dependent connectedness. The GJR-GARCH estimates indicate significant volatility clustering, high persistence, and statistically significant asymmetric leverage effects, particularly in the oil market. The DCC-GARCH results show that the conditional correlation between oil prices and the BSMI is time-varying and highly persistent (i.e., a + b ≈ 0.71). The correlation rose sharply during episodes of heightened global uncertainty such as the COVID-19 pandemic. The BEKK-GARCH estimates identify unidirectional volatility transmission from global oil prices to BSMI-listed equities, with no statistical or economic evidence of transmission in the opposite direction, consistent with the status of Bahrain as a small open economy that is influenced by, but has limited influence on, global oil price formation. The full-sample Diebold–Yilmaz Total Connectedness Index is 8.37%, rising to nearly 50% during the COVID-19 crisis—a regime shift confirmed by a Newey–West HAC robust test. Overall, these findings have implications for portfolio risk management, hedging strategy design, and macroprudential surveillance in oil-exporting small open economies.