Intra-regional integration of the GCC stock markets: the role of market liberalization

Abstract

The study examines empirically whether, and to what extent, equity markets in the Gulf Cooperation Council (GCC) are integrated inter-regionally. According to the official Charter of the GCC, building stronger ties among financial and capital markets of member states is a chief objective of the GCC. The results for the equity markets of Saudi Arabia, Kuwait, Bahrain and Oman suggest that these markets share a common stochastic trend that binds them together over the long-run. The results from alternative tests also indicate that measures taken since 1997 to liberalize the capital markets in the Gulf region are at least partly responsible for linking the Gulf markets. At least two implications emerge from these results. First, portfolio diversifications in the context of the Gulf region should bring little or no benefits to investors with long-term horizons, although short-term gains remain a possibility. Second, further steps to liberalize capital markets in the region appear an appropriate strategy for achieving a more integrated capital markets in the Gulf.

Acknowledgements

The authors wish to thank Khaled Elkhal and Shawkat Hammoudeh for help with data. Ali F. Darrat gratefully acknowledges financial support from the Economic Research Forum. We thank an anonymous referee and Mark Taylor, the Editor, for helpful comments and suggestions. The usual disclaimer applies.

Notes

¹ See, for example, Corhay et al . (1995), Kwan et al . (1995), Chan et al . (1997), Bowe and Mylanidis (1999), Ghosh et al . (1999), Phylaktis (1999) and Darrat and Zhong (2002).

² This verdict persists despite the use of different model specifications including the use of various lag lengths and the use of trend and trendless specifications. These results are not reported here to conserve on space, but are available from the authors upon request.

³ The dummy variable is included as an exogenous variable in the tested vector. Including the dummy variable endogenously altered none of the conclusions. These alternative test results are not reported here to conserve space, but are available from the authors upon request.

⁴ While testing cointegration separately in the two sub-periods does avoid the problem of testing under regime shifts, the time span in the pre-market liberalization period may be too short to generate credible cointegration results.