Institutions and return predictability in oil-exporting countries

We study whether oil price changes have predictive power for stock market returns in oil-exporting countries, and we investigate the link between predictability and the quality of each country's institutions. Returns are predictable for half the countries we consider, and predictability is stronger when institutional quality is lower. We argue that the relation between predictability and institutional quality reflects the preference of countries with weaker institutions to consume oil windfalls locally rather than smooth out their impact by, for example, investing the proceeds internationally. Published by Elsevier Inc. on behalf of Board of Trustees of the University of Illinois.