Oil prices are major indicator of the Global economy. The slump in the oil prices was an indicator of the economy going down and heralding of the recessionary period. The worse fear of the world came out to be true when the economy actually went into recession and is currently reeling under the job cuts and the slowing down of the financial sector.
There is another linkage parameter similar to the oil price which is identified to be reflecting the current state of economy and that is the financial position of the banks. The banks in question here is the Abu Dhabi Islamic Bank (ADIB) and the overall index of Abu Dhabi Securities Exchange (ADSE) Market.
This paper aims to investigate the relationship between the monthly changes in oil prices and the monthly change in the share price or performance of Abu Dhabi Islamic Bank during the year 2007 and 2008 by using the regression analysis.
Another relationship this paper would be investigating is, if the monthly changes in oil price have more variability than the variability of the monthly changes in the overall index of Abu Dhabi securities market. The paper refers to the various data sources, as given in the references, on internet as well as published material for the data related with the research and also highlights the methodology adopted to conduct the research to narrow down the ideas on the relationship between the oil price and the performance of the Abu Dhabi Islamic bank (ADIB) as well as the overall index of the security markets.
The slump in the oil prices as well as the index of the various securities across the world had been unprecedented during last one year. Nobody expected that there would be such a sudden drop in the price of crude oil during the month of Oct- Nov 2008 (from 77 USD to 7 USD). The same story repeated for the ADSE, Abu Dhabi Banking fund (ADBF) and ADIB though with a twist in the tale. The ADSE was reduced from 3940 to 3300, ADBF was reduced from 5020 to 4200 while ADIB share price reduced from 4.22 to 3.38. The twist was that even though the crude recovered in the next month, the index funds and the share price did not.
This paper analyses the trend of the crude price against the ADIB share price as well as the ADSE overall index to arrive at the relationship between them. The paper looks at the relationship by taking the outliers out of the analysis and then incorporating in the analysis to highlight the difference they make.
Finally, the paper draws conclusions from the analysis and provides few recommendations.
The methodology of analysis of this paper relies heavily on the online sources of data as mentioned in the references. The steps are to first collect the relevant data from the different site, refer the appropriate sources for the regression process, collate the collected data into the numerical and the graphical form, conduct the regression analysis with and without outliers to postulate the relationship between the various trends in the data of crude prices, ADIB share price, ADSE overall index value and the ADBF index value, drawing the conclusion from the various analysis and providing recommendations on the basis of the conducted analysis.
The regression analysis to identify the relationships between the various trends is conducted using MS-Excel. The analysis is executed in two parts – one of them is to exclude the outliers as there are two of them in the crude oil price trend while another is conducted without removing the outliers to give a realistic picture.
The matching of the trend is observed until end of Oct 08, when the crude oil price jumped back to “normal” rates while the banking business did not rebound back to its “before” Oct 08 position. It would be prudent to mention here that while the oil prices have reached to its normal level, the ADIB share price is still reeling at the Oct 08 level, which is true for the entire banking industry currently.
3.0 Data Collection
Three types of sources of data were primarily used. One was to get the crude oil rates of the year 2007-2008, another one was to get the share price of the ADIB and overall index of ADSE and ADBF for last two years.
The data was collated in the table as given below against the required time frame and the relevant graphs were plotted to check the trend visually and the regression analysis was conducted to investigate the relationship between the monthly changes in oil prices and the performance of Abu Dhabi Islamic Bank during the 2007-2008 timeframe.
The raw data of the share price of ADIB was downloaded (ADX, 2009) and is available in the appendix. The relevant details like the share price, overall index and the crude price was extracted from the raw data and the month over month percentage change in all the indicators was calculated to bring the data to the same level of unit as well as this was required for subsequent action to answer the questions in the assignment.
The share price of ADIB and the crude price were directly pulled from the relevant sites but the overall index of ADSE as well as the ADBF index on ADSE was picked up from the charts option in the ADSE webpage. The final summarized combined data is presented in the next section along with the trend graphs for various parameters as required by this study.
Numerical and graphical summaries of the collected data
Following table represents the trend of the various data with respect to time, collected from sources indicted in the references.