Do gulf stock markets share time varying connectedness

ABSTRACT

This article examines the presence of spillover and time varying correlation between returns of Islamic stock markets in the Gulf region. Our sample comprises six Gulf equity market returns i.e. Oman, the UAE, KSA, Bahrain, Qatar and Kuwait ranging from June 2005 to January 2022. We use spillover and wavelet multiple cross-correlation methods for data analysis. Our results highlight that the equity markets of Oman and UAE exhibit significant correlation with each other in the medium-run investment period which decreases in the short-run. UAE highlights significant integration with rest of the Gulf markets. Our results also highlight spillover between the stock returns of UAE and Oman during both short- and long-run periods. Among all markets, UAE appears to exhibit maximum integration with other markets. These results carry implications for the investment in the Gulf stock markets during different investment horizons.

KEYWORDS:

• Islamic stock markets
• wavelet
• spillover
• time-varying correlation

GEL CODES:

• G11
• G12

Acknowledgement

This research work was funded by Institutional Fund Projects under grant no (IFPRC-131-130-2020). Therefore, authors gratefully acknowledge technical and financial support from the Ministry of Education and King Abdulaziz University, DSR, Jeddah, Saudi Arabia.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ Overall, the term ‘Islamic finance’ is extensive, and it encompasses a wide range of products, services, and business models. Several key countries account for most of its market share, which is both concentrated and significant, vis-a-vis Malaysia, Saudi Arabia, Indonesia and Iran. Conflicting viewpoints on Islamic investments and their potential impact on the economy have fuelled research in this area.

² It is the private sector development arm of the Islamic Development Bank.

³ The Islamic-compliant stock market stands out as different from its counterpart because of its Shariah guidelines regarding investment (Alam et al. 2017). According to recent reports, GCC countries have taken steps to better regulate their stock markets by enacting new capital market regulations, confirming that development processes are moving in the right direction. (IMF periodic report 2019).

⁴ Discriminatory taxes is considered as one of the factor, preventing foreign fund manager to invest in GCC (Aloui and Hkiri 2014).

⁵ In an attack on Qatar’s state news agency website on 23 May 2017, hackers made false statements attributed to the country’s Emir. The Emir’s remarks were broadcast on a number of UAE and Saudi-owned television channels. In a diplomatic break with Qatar on June 5, Saudi Arabia, UAE, Bahrain and Egypt issued two weeks’ notice to their citizens to return home. The four countries immediately closed their borders, claiming that Qatar was a terrorist supporter and posed a threat to their national security.

⁶ Also see Diebold and Yilmaz (2012).

⁷ Our work aims to examine returns spillover following the work of Diebold & Yilmaz (2009). For this purpose, VAR model is constructed using returns. Our results are based on vector auto-regression of order 2 based on SIC. Following the work by Diebold & Yilmaz (2009), we use 10-step forecasting horizon..