Financial integration in the Gulf Region

Abstract

This thesis studies international financial integration in the Gulf region. It develops measures of international financial integration for the Gulf Cooperation Council (GCC) countries, investigates the drivers of financial integration, and examines volatility spillovers from regional (Saudi) and global (US) markets to GCC stock markets. The GCC was established in 1981, when a unified economic agreement between six countries, Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates, was signed with the objective of realising coordination, integration, and cooperation in various aspects of economic affairs. Understanding of the drivers of international financial integration will provide important insight into the process of monetary and financial integration and of shaping policy decisions in the GCC region. The overall contribution of this thesis is to provide a careful review and understanding of the financial integration, and offer valuable information for policy makers in the GCC region. In this regard, the thesis analyses the degree of international financial integration of the GCC member countries with the rest of the world by employing several quantity measures for international financial integration based on foreign assets and liabilities. The thesis develops time-varying measures of international financial integration of GCC countries based on the international asset pricing theory by employing the multivariate DCC-GARCH model of Engle (2002). The thesis examines the drivers and impact of global financial crisis on GCC countries' international financial integration. The thesis employs three different bivariate GARCH(1,1) models in symmetric and asymmetric cases (constant correlation (CCC), dynamic correlation (DCC), and BEKK models) to examine the volatility spillover effects from global (US) and regional (Saudi) stock markets to the other five GCC stock markets by allowing the unexpected returns of any particular GCC stock market be driven by three sources of shock: local, regional from Saudi Arabia and global from the United States. The thesis investigates the determinants of volatility spillovers from the Saudi to the GCC stock markets. The findings have strong implications for policy makers of GCC countries. The thesis makes several significant contributions by analysing international financial integration in the GCC region. This is the first study that focuses on the development of measures of international financial integration of GCC member countries with the rest of the world based on external asset and liability positions, and the first to empirically examine the drivers influencing international financial integration between the GCC countries and the rest of the world. This is the first study to develop a time-varying financial integration index for GCC stock markets based on the international asset pricing theory, by employing a multivariate DCC-GARCH model and examines drivers of the stock market integration index. This is also the first study to investigate the effects of spillovers from the US and Saudi stock markets to GCC stock markets by considering innovations from the Saudi and US markets as regional and global shocks respectively, and examines the determinants of volatility spillovers from Saudi Arabia to GCC markets. No previous study has so far explored the impact of spillovers from global (US) and regional (Saudi) stock markets to GCC stock markets.

Date of Award	2014
Original language	English