Determinants of international financial integration of GCC markets

The international financial integration measures capture the size of foreign investment globally that is appropriately scaled and consistent over time. The measure of the activity in the global capital market is to consider the total stock of overseas investment at a point in time. The foreign capital stock at each point in time should be normalized by some measure of the size of the world economy, by a denominator in the form of nominal size index. A suitable denominator would probably be the total stock of capital, whether financial or real because the numerator is the stock of foreign-owned capital. The problem with using financial capital measures is that they have greatly multiplied over the long run with the rise in numerous financial intermediaries and financial development has expanded the number of balance sheets in the economy. This trend could happen at any point in time without any underlying change in the extent of foreign asset holdings. The problem with using real capital stocks is that only a few countries have a reliable data from which to estimate capital stocks. Most of these estimates are accurate only at benchmark censuses and in between census dates they rely on combinations of interpolation and estimation based on investment flow data and depreciation assumptions. Most of these estimates are calculated in real (constant price) rather than nominal (current price) terms, which make them disproportionate with the nominally measured foreign capital data. This paper utilizes a readily available size of an economy, namely the level of output (GDP) measured in current prices in a common currency unit.