Gulf Cooperation Council (GCC) Stock Markets: The Dawn of a New Era. Jorg Bley 1 and Kim Heng Chen American University of Sharjah

Transcription

1 Gulf Cooperaion Council (GCC) Sock Markes: The Dawn of a New Era Jorg Bley and Kim Heng Chen American Universiy of Sharjah Absrac Economic reforms and coninuing marke liberalizaion in he GCC srongly affec invesors demand for shares, resuling in an almos ripled marke capializaion and a more han quadrupled average daily urnover, since We analyze he impac of his remendous increase in marke aciviy and he region s drive owards economic inegraion on he reurn behavior and he dynamic relaionships among he regional sock markes. The objecive is o deermine he marke dynamics and conemporaneous ineracions of he sock markes of Bahrain, Kuwai, Oman, Qaar, Saudi Arabia, and he Unied Arab Emiraes. While he reurn behavior is clearly no homogeneous, we find evidence of increasing marke inegraion. Keywords: Sock Reurn Behavior, Marke Dynamics, Marke Inegraion EFM Classificaion: 620, 630 Corresponding auhor: Jorg Bley, The American Universiy of Sharjah, School of Business and Managemen, P.O. Box 26666, Sharjah, Unied Arab Emiraes, Phone: (0976) , Fax: (0976) , jbley@aus.ac.ae

2 . Inroducion Sock Markes in he Middle Eas are growing a a breahaking pace. Wih Oil prices a heir highes levels in 20 years and ineres raes as low as one percen, invesors need a saggering $53bn in profis in 2003 and $72bn so far in 2004, mos of which were generaed in he Gulf Cooperaion Council (GCC) markes of Bahrain, Kuwai, Oman, Qaar, Saudi Arabia, and he Unied Arab Emiraes (UAE). In less han wo years, oal GCC marke capializaion increased by 6%, from $63.3bn in 2002 o $427.2bn in Sepember of While he highes marke growh raes were experienced by Qaar (+230%), Bahrain only grew by 65%. By far he larges sock marke is Saudi Arabia, wih a marke capializaion of $237.bn. Founded in 2000, he combined marke capializaion of Dubai and Abu Dhabi ($67.bn) have already elevaed he UAE sock marke o he second larges sock marke in he GCC region, closely followed by he Kuwaii sock marke ($65.9bn), which was esablished more han weny years ago. On overview of regional sock marke and economic characerisics can be found in Table. Economic reforms and coninuing marke liberalizaion srongly affeced demand for shares, resuling in a more han quadrupled (since 2002) average daily urnover. Wih an average daily rading volume of $.93bn, Saudi Arabia is he mos acive of he GCC sock markes. And while he regional markes in he pas were a widely reserved playing field for GCC ciizens, foreign invesors who were only allowed sock ownership hrough muual funds, if a all, are now given more freedom o direcly inves in he shares of local companies. The curren economic picure could no be brigher. High oil and gas prices creaed an enormous perodollar. This ime, however, he perodollar boom is of an unprecedened qualiy. The confluence of economic reforms wih a growing appeie

3 for Islamic-complian invesmens and he poliically moivaed, pos Sepember repariaion of Arab money, provide he GCC counries wih he financial means necessary o vigorously pursue he level of indusrial diversificaion ha would ensure economic growh and prosperiy beyond he boundaries se by he ineviable depleion of naural resources, he wealh sicks. The GDP per capia of Kuwai ($3,400) and he UAE ($9,630) already compares favorably wih mos Wesern economies and he real GDP growh raes of he enire GCC region is among he highes in he world. The coninuing economic expansion and he opening of he securiies markes o foreign invesors is likely o fuel ineres in equiy and deb securiies of local companies even furher. Accompanied by he requisie legal and regulaory sock marke reforms, he region s prospering financial markes can promoe necessary economic reforms by more efficienly allocaing invesmens o new indusries, widening he invesor s base, and ulimaely reducing local companies cos of capial. As he ongoing globalizaion demands coordinaion of he GCC economies, regional leaders have se heir eyes on he blueprins of he European Union. In January 2003, he GCC cusoms union was launched, represening an imporan firs sep in he process of economic inegraion. Following he example of he European Union, he declared goal is a common marke in 2007 and a single currency in In fac, in sudying he requiremens and procedure needed for a moneary union, he European Cenral Bank is already providing assisance. In April 2004, key crieria for economic and fiscal inegraion, relaing o budge defici, ineres and inflaion levels, were se by he six GCC member saes. See Socks are ho in Arab Gulf; Perodollar Boom is fuelling IPOs and Equiy Markes, by Simeon Kerr, Wall Sree Journal, November 22, The currencies of he GCC member saes are pegged o he US dollar excep he Kuwaii dinar, which is pegged o a baske of currencies including a heavy weighed US dollar. 2

4 In he pas, sock markes in he Middle Eas have been widely ignored by inernaional invesors due o imposed resricions on foreign sock ownership, he lack of common accouning sandards and corporae ransparency, or dismissed simply on he basis of economic and poliical uncerainy. As a consequence, and due o he difficuly of obaining sufficien and reliable marke daa, researcher did no focus on he regional financial markes. The scarce research on Middle Eas financial markes was conduced on eiher individual sock markes (for example Erb, Harvey, and Viskana, 996) or on a se of markes of he Middle Eas and Norh African (MENA) region. For example, Abraham, Seyyed, and Al-Elg (200), Darra, Elkhal, and Hakim (2000), and Omran and Gunduz (200) analyze various MENA marke subses bu could no find any significan cross-linkages despie marke proximiy. Harvey (995a and 995b) discovers risk/reurn behavior and volailiy clusering of seleced MENA markes ha differs from emerging marke characerisics, i.g., low correlaion wih Wesern marke reurns or high volailiy, commonly found in Asia, Lain America or Easern Europe. Based on daily reurn daa, Hammoudeh and Aleisa (2004) found wo equilibrium relaionships wih varying predicive power among GCC sock markes. The auhors idenified Saudi Arabia as being mos influenial on he reurn behavior of he oher GCC markes. The auhors did no include, however, he marke of Qaar wih a capializaion of currenly $34.6bn, exceeding ha of Bahrain ($2.7bn) and Oman ($9.3bn). The remendous increase in marke aciviy, which is likely o have impaced reurn behavior, and he GCC economies firs seps owards economic inegraion may already have alered he dynamic relaionships among he regional sock markes. By including he region s wo younges markes of Qaar and he UAE, his paper provides a firs ime, cohesive repor on he sock reurn behavior of all six GCC 3

5 counries. The objecive is o deermine he marke dynamics and conemporaneous ineracions of he sock markes of Bahrain, Kuwai, Oman, Qaar, Saudi Arabia, and he Unied Arab Emiraes. In paricular, we aemps o () deermine he degree of marke inegraion, (2) qualify he reurn sensiiviy among he markes, (3) reveal any lead-lag relaionships, and (4) analyze degree and saionariy of relaive marke comovemens. 2. Daa and Mehodology Daily hisoric prices on six GCC counry marke indices were made available by Reuers Middle Eas and Shuaa Capial in Dubai, UAE. The daa range is /2000 o 9/2004 for he sock markes of Bahrain, Kuwai, Oman, Qaar, Saudi Arabia, and he Unied Arab Emiraes. For each price index, a series of weekly naural log prices and weekly naural log reurns was generaed. 3 The daa series are divided ino wo subperiods. The firs period includes 30 weekly observaions (/2000 6/2002), he second period covers he subsequen 7 periods (7/2002 9/2004). The UK sock marke, as he larges European marke, and he US sock marke, as he larges sock marke in he world, are included in he analysis for wo reasons: Firs, o deermine he impac of hese major markes on he emerging sock markes of he GCC region and second, following he reasoning of Janakiramanan and Lamba (998) and Dekker, Sen, and Young (200), o preven any possible disorion of linkage paerns among he GCC markes by allowing for he possible indirec influence of US and UK markes. 3 The rading periods differ across he GCC counries. While he sock marke in Saudi Arabia is open six days a week, all oher markes have 5-day rading week. Markes are closed on Thursday/Friday (Kuwai), Friday/Saurday (Bahrain, Oman, Qaar and UAE), and Friday only (Saudi Arabia). To ensure consisency and comparabiliy, he weekly index observaions used in his analysis were made based on Wednesday s closing prices. 4

6 Before carrying ou a coinegraion es, he nonsaionariy of he daa series has o be esablished. To his exen, each marke index is esed for he presence of uni roos using he Augmened Dickey Fuller (ADF) es (Dickey and Fuller 979). Assuming he series have a non-zero mean, a consan is included in he regression. The null hypohesis of a uni roo is esed agains he alernaive hypoheses of a saionary auoregressive process and a saionary auoregressive process wih a rend. To ensure ha he OLS regression will give an unbiased esimae of he lag coefficiens, he number of lags included in he ADF is opimized by minimizing he Schwarz Informaion Crieria (SIC) and he presence of no auocorrelaion in he residuals. Relaxing he i.i.d. (0, σ 2 ) assumpion and allowing errors o be dependen wih heeroscedasic variance, a Phillips-Peron es is conduced o verify he ADF resuls. Finally, since i is well known ha he ADF ess nooriously have lower power agains he saionary alernaive (see for example Crowder 996), a KPSS es (Kwiakowski, Phillips, Schmid, and Shin 992) under he reversed null hypohesis ha he variable is saionary is conduced o ensure he robusness of he es resuls. Subsequenly, he presence of a uni roo in he firs differences of index prices is esed o verify ha he order of inegraion is. The Johnsen (Johansen 988) and Johansen and Juselius (Johansen and Juselius 990) coinegraion procedure is implemened based on a vecor auoregression (VAR) model, which Sims (980) and Dekker e al. (200) argued gives a realisic descripion of marke linkages, formally: () X = A y Ap y p + µ + δ + ε ( =,, T) 5

7 where X is a n-dimensional vecor of GCC markes prices (n = 6); A,, A p are n x n coefficien marices; µ is a vecor of consans; δ is a vecor of rend coefficiens and ε is a vecor of innovaions ha may be conemporaneously correlaed bu are uncorrelaed wih heir own lagged and uncorrelaed wih any of he righ-hand side variables (whie noise). The minimum lag lengh o eliminae auocorrelaion in he residuals is denoed wih p. Wihin he framework of coinegraion, he daa generaing process of X should be modeled ino an error correcion model (ECM) wih p- lags o avoid variable misspecificaions (Engle and Granger 987): (2) X = ΠX + i= p Γi X + µ + ε where he long-run muliplier marix Π = αβ, α and β are n x r marices (r is he number of coinegraing vecors). The error correcion coefficiens conained in α measure he exen o which each variable responds o disurbances in he long-run equilibrium, while he parameers (Γ,, Γ p - ) of dimension n x n define he shorrun adjusmen o changes in he variables, which implies he presence of p r common rends (Gonzalo and Granger 995). The model is srucured such ha shorrun deviaions from he long-run equilibrium will be correced. The race saisic ess he null hypohesis of a mos r coinegraing vecors. The alernaive hypohesis is he exisence of p (he number of endogenous variables) coinegraing vecors. Formally, (3) λ race r = T ln( λi ) p i= r+ where λ i is he larges i h eigenvalue of he long-run muliplier marix Π. The null hypohesis of r coinegraing vecors agains he alernaive of r + coinegraing vecors is esed by compuing he maximum eigenvalue, formally: 6

8 (4) λ max r r+ = T ln( λr+ ) Lükepol and Reimers (992) have argued ha he individual coefficiens of an ECM are difficul o inerpre as a shock o he i h variable may no only affec he variable iself bu also be ransmied o oher endogenous variables in he sysem hrough he dynamic lag srucure of he VAR. If he innovaion vecor ε increases by a vecor d, he effec upon X +n is given by A p d, where (5) A p X = ε + n wih he elemens i, j measuring he effec of a one-uni increase in ε. If only he firs elemen ε of ε changes, he effecs are given by he firs column of A p. The elemens in he firs column and he j h row of A,, A p race he dynamic effecs of an innovaion in he i h marke on all he oher markes j individually, hereby providing insigh ino he dynamic ineracions among GCC markes. Hamilon (994) showed ha he underlying impulse response funcion can be deermined by simulaion mehods. Koop, Pesaran, and Lee (996) derive generalized impulse responses from an orhogonal se of innovaions o he j h variable by incorporaing a variable specific Cholesky facor o he j h variable. The relaive imporance of each random innovaion in i h marke on marke j, is deermine by he generalized forecas error variance decomposiion echniques of Pesaran and Shin (998). 4 While he resuls of he generalized forecas error variance decomposiion qualify he impac dynamics of innovaions among GCC sock markes, he impac direcion is revealed by using he 4 An alernaive approach would be he Choleski facorizaion (Lükepol 99). This procedure, however, is sensiive o he ordering of variables when he covariance marix of he error erms is nondiagonal. 7

9 8 Granger causaliy es (Granger 969). In a bivariae sysem of joinly saionary ime series x and y, he variable x is said o Granger cause y if lagged x improves he predicions of y, even afer lagged y variables have been excluded as explanaory variables (Granger 988). The vecor auoregression model can be used o invesigae he lead-lag relaionship wihin he co-dependen GCC sock markes. Given (6) = = = = = = q j j j q i i i q j j j q i i i y x c y and y x c x , ε β α ε β α where q is he order of he respecive lag variable. An F-es for he join significance of α 2i,, α 2q (β j,, β q ) is formulaed o es if x Granger causes y (y Granger causes x). Possible nonsaionariy in he degree of relaive comovemen among GCC and wih he UK and US sock markes is invesigaed based on a comparison of correlaion coefficiens beween he firs period (/2000 6/2002) and he second period (7/2002 9/2002). According o Kendall and Sewar (967), he null hypohesis of correlaion coefficien equaliy, H 0 : r = r 2, can be esed as follows: (7) ( ) + = n n z z Z ~ N (0, ) provided r and r 2 ; n and n 3 >3 + = + = ln, 0.5ln : r r z and r r z where The number of reurn observaions in each period is denoed wih n. A higher level of inegraion beween wo sock markes would be suggesed by a significan increase in he correlaion coefficien (Taylor and Tonks 989).

10 3. Resuls The hree uni roo es resuls are shown in Table 2, suggesing he exisence of a uni roo in he weekly index series of all six GCC sock markes across he wo subperiods. Only in he case of Bahrain, does he ADF es indicae he possible saionariy in he firs subperiod a he 0%-level. Given he more robus PP es saisics (which rejec saionariy a he 0%-level) and KPSS es saisics (which acceps nonsaionariy a he 5% significance level), however, i is reasonable o assume uniformly he presence of a uni roo. Tes resuls of firs differences indicae he order of inegraion o be. Descripive saisics of weekly reurns are shown in Table 3. GCC sock markes clearly ouperformed heir wesern counerpars. While UK and US sock markes saw vasly declining prices as a consequence of he bursing of he new economy bubble, GCC sock markes grealy benefied from in par poliically moivaed repariaion of Middle Easern funds. Over he full period, average weekly reurns for GCC markes range from 0.3% (Bahrain) o 0.6% (Kuwai), compared o -0.05% and -0.% for he UK and he US, respecively. In he firs period, Bahrain (-0.5%) and Oman (-0.2%) were he only GCC markes wih negaive weekly reurn averages, ye UK and US marke performances were even worse, averaging % and -0.28%, respecively. Mos sriking is he performance difference in he second period. UK and US markes generaed he lowes reurns wih he highes sandard deviaions, leading o he leas favorable risk/reurn relaionship, as measured in form of he coefficien of variaion (CV), among he eigh markes wih 6.79 and 36.73, respecively. In conras, he risk/reurn relaionship in he GCC counries seems o be no only more advanageous bu also quie homogeneous. The CV difference among he markes of Bahrain (2.93), Kuwai (2.57), Oman (2.67), Saudi 9

11 Arabia (2.98), and he UAE (2.37) is a mere 0.6. The reurn disribuion appears o be lepokuric for all markes, wih a generally low degree of posiive skewness wih he excepion of Kuwai and Saudi Arabia. The mulivariae coinegraion es resuls of he error correcion model (eq.2), as repored in Table 4, sugges he absence of any coinegraing vecors among he GCC markes for he period of /2000 6/2002. While he criical values of he race es indicae he exisence of a single coinegraing vecor only in he linear rend model (a he 5%-level), he null hypohesis of zero coinegraing vecors canno be rejeced based on he maximum eigenvalue saisics. These resuls sugges ha he emerging sock markes of he GCC region were relaively independen from each oher during he earlier period. This picure of heerogeneiy in he price behavior changed dramaically during he subsequen period. Boh race saisics of he sixdimensional ECM of sock prices in Bahrain, Kuwai, Oman, Qaar, Saudi Arabia, and he Unied Arab Emiraes idenified hree coinegraing vecors for he period of 7/2002 9/2004. The resuls of he generalized forecas error variance decomposiion documen ha he index reurn variaions in he GCC counries dependens o a greaer exen on shocks from wihin he region raher han from he ouside. Table 5 shows ha afer four weeks, he average error variance of an individual GCC sock marke explained by he sum of index variances of all oher sock markes in he region is abou.6% in he second period (down from 3.5% in he firs period). In conras, only abou.6% of individual GCC sock marke variaion can be explained by US (up from 0.5%) and UK (down from 3.8%) innovaions. And while US marke innovaions have he highes impac on Bahrain and Saudi Arabia, Kuwai seem o be mos sensiive o UK marke innovaions during he second period. Resuls of changes in 0

12 explanaory power of GCC innovaions on individual markes in he region over ime are mixed. While Bahrain, Oman, and Saudi Arabia became less sensiive, Kuwai, Qaar, and he UAE became more sensiive o GCC marke innovaions. A more deailed breakdown of he error variance sensiiviies four weeks afer he iniial shock is provided in Table 6. Mos sriking is he grea impac of innovaions in Saudi Arabia on he Unied Arab Emiraes (0.6% in he second period). This reflecs he srong economic and poliical ies beween he wo counries. On average, sock marke innovaions in Saudi Arabia can explain 4.2% of he error variances in all regional markes, followed by Bahrain (3.7%), Kuwai (2.4%), Oman (.8%), he UAE (.4%), and finally he leas influenial marke Qaar (0.4%). The greaer change in explanaory power is found in Bahrain, down o an average of 3.7% from 6.0%. Among he wo mos recenly emerged markes, he UAE has gained influence wihin he region (.4% afer 0.2%) while Qaar has los relaive imporance (0.4% afer.2%). While impulse response funcions race he effec of a shock o one endogenous variable on o he oher variables in he VAR, variance decomposiion separaes he variaion in an endogenous variable ino he componen shocks o he VAR. In general, inferences from he impulse response analysis suppor he resuls of he variance decomposiion procedure. The paricular findings are shown in Table 7. For example, a generalized one sandard deviaion shock o he marke in Bahrain riggered he greaes iniial response during he firs period from Saudi Arabia (0.099) and Oman (0.074). The magniude of he Omani marke response decreased during he second period o 0.033, while he Saudi marke hardly responded a all ( ). As shown in Table 6, he explanaory power of he Bahraini marke on Omani

13 and Saudi marke variaions wen down from 5.27 and 0.37 o 9.9 and 3.29, respecively. Over ime, he responsiveness of one marke o shocks in anoher marke has increased noiceably in case of Oman and Qaar. Also, impulses given by he fas growing marke of he UAE generaed greaer responses from all GCC markes in he second period, underlying he growing regional imporance of he Dubai financial markes. Responses o US and UK marke impulses generally confirmed he findings of he variance decomposiion, in paricular he growing marke impac of he UK on Kuwai and he US on Saudi Arabia. The greaer US marke impac on Bahrain, as suggesed by he resuls of he variance decomposiion, was no refleced in he oucome of he impulse response analysis. Afer qualifying he impac dynamics of innovaions among GCC sock markes, he impac direcion is analyzed by using he Granger causaliy es. The es resuls indicae ha in he firs period he US marke was mos influenial o he markes of or Granger caused Bahrain, Kuwai, and Saudi Arabia (Table 8). This causaliy disappeared during he second period. In general, Granger causaliy es resuls suppor he findings of he preceding variance decomposiion and he impulse response analysis. For example, variance decomposiion revealed ha innovaions in he Bahraini marke could explain a greaer porion of he marke variance in Oman hen innovaions in he Omani marke could explain variance in Bahrain. Similarly, a one sandard deviaion impulse from he marke in Bahrain would rigger a greaer response in he Omani marke han ha of he Bahraini marke o he same impulse emied from he marke in Oman, according o he resuls of he impulse response analysis. I is herefore no surprising ha Bahrain is found o Granger-cause Oman. Also, Saudi Arabia, as he mos influenial among he GCC markes, seemingly Granger-caused Oman and Qaar. No causaliy could be esablished, however, 2

14 beween he sock markes of he closely conneced economies of Saudi Arabia and he Unied Arab Emiraes. The final sep in he analysis of he conemporaneous srucure of marke ineracion is aken by esing he equaliy of correlaion coefficiens in he wo periods. According o he resuls shown in Table 9, he average correlaion coefficien among he six GCC markes is a mere 0.2 in boh periods. The implicaion is duo fold: Firs, he level of GCC sock marke inegraion is relaively low, suggesing ha he fas growing economies of he Middle Eas are sill quie heerogeneous. Consequenly, GCC ciizens, and o a lesser exen non-gcc ciizens would benefi grealy from a regional diversificaion of heir sock porfolios. Second, while he change of correlaion coefficiens among GCC counries is no uniform, he overall degree of co-movemen has no changed since 2000, despie poliical evens ha could sugges oherwise. Also, he degree of co-movemen beween he GCC markes and US and UK markes overall has remained fairly sable. The only excepion is he significan decrease in he correlaion coefficien of he US and he UAE (-0.05 afer 0.6). Given he similar correlaion coefficien wih he UK (-0.07), and he fac ha UAE correlaions wih all oher GCC markes have increased, especially wih Saudi Arabia, i appears as if he UAE is emerging ino he financial hub of he Middle Eas almos independenly of major Wesern markes. Finally, as already suggesed by he variance decomposiion procedure and he impulse response analysis, boh he US and he UK markes have surprisingly lile impac on sock marke reurn behavior in he Middle Eas. 3

15 4. Conclusion Condiioned on he coninuaion of economic reforms and a furher liberalizaion of financial markes in he GCC region, invesors are likely o benefi from above average sock reurns. Relaively low reurn volailiy and minimal foreign exchange rae exposure hrough he dollar peg promise an advanageous risk/reurn relaionship. In addiion, he low correlaion of GCC markes and wih US and UK markes poin o diversificaion opporuniies for inernaional invesors. Diversificaion wihin he GCC region is sill beneficial as marke reurn behavior is ye far from homogeneous. Coinegraion analysis has discovered he increase in he number of coinegraing vecors. This is likely o be he reflecion of ongoing aemps o synchronize marke economies in preparaion for an economic union and ulimaely he inroducion of a single currency. Consequenly, marke reurn behavior is likely o become more homogeneous wihin he six GCC. Saudi Arabia clearly dominaes GCC sock marke aciviies and consiues he bulk of GCC marke capializaion. The Saudi sock marke leads he markes of Oman and Qaar and explains a relaively high porion of he error variances in all he oher GCC markes. The UAE, ofen regarded as he regional safe haven, is gaining marke influence and is impulses rigger an increasing response from oher marke in he region. Wesern markes have surprisingly lile impac on sock marke reurn behavior in he GCC region. This may change emporarily as financial markes embrace more foreign invesmens. Wih he formaion of he economic union, however, Wesern influence on GCC markes will remain limied while he sock marke behavior among he markes of Bahrain, Kuwai, Oman, Qaar, Saudi Arabia, and he Unied Arab Emiraes is likely o become more homogeneous. 4

16 References Abraham, A., F. Seyyed, and A. Al-Elg Analysis of Diversificaion Benefis of Invesing in he Emerging Gulf Equiy Markes, Managerial Finance 27: Crowder, W. 996 A Reexaminaion of Long-Run PPP: The Case of Canada, he UK, and he US, Review of Inernaional Economics 4 (): Darra, A., K. Elkhal, and S. Hakim On he Inegraion of Emerging Sock Markes in he Middle Eas, Journal of Economic Developmen 25: Dekker, A., K. Sen, and M. Young Equiy Markes in he Asia Pacific Region: A Comparison of he Orhogonalized Generalized VAR Approaches, Global Finance Journal 2: 33. Dickey, D. and W. Fuller Disribuion of he Esimaors for Auoregressive Time Series wih a Uni Roo, Journal of he American Saisical Associaion 74: Engle, R. and C. Granger Co-inegraion and Error Correcion: Represenaion, Esimaion, and Tesing, Economerica 55: Erb, C., C. Harvey, and T. Viskana Expeced Reurns and Volailiy in 35 Counries, Journal of Porfolio Managemen (Spring): Gonzalo, J. and C. Granger Esimaion of Common Long-Memory Componens in Coinegraed Sysems, Journal of Business and Economic Saisics 3: Granger, C Invesigaing Causal Relaions by Economeric Models and Cross Specral Mehods, Economerica 37: Some Recen Developmens on a Concep of Causaliy, Journal of Economerics 39: Hamilon, J Time Series Analysis, Princeon Universiy Press, Princeon. Hammoudeh, S. and E. Aleisa Dynamic Relaionships among GCC Sock Markes and NYMEX Oil Fuures, Conemporary Economy Policy 22: Harvey, C. 995a. The Cross-Secion of Volailiy and Auocorrelaion in Emerging Markes, Finanzmark und Porfolio Managemen 9: b. Predicable Risk and Reurns in Emerging Markes, Review of Financial Sudies 3:

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18 Table : GCC Sock Marke and Economic Characerisics Markes/Economies: Characerisics Bahrain Kuwai Oman Qaar Saudi Arabia UAE Sock rading began Curren marke sysem esablished Elecronic rading since Number of companies lised Marke capializaion (US$bn) Average daily rading volume (mil. shares) Average daily rading volume (US$mil.) Max.% of foreign invesmen Foreign invesmen hrough muual funds yes yes yes yes yes yes Regional cross-lising yes yes yes no no no Lengh of selemen procedure (days) real ime 2 Sock/index fuures rading no limied no no no no Marke index January Marke index Sepember Average index reurn p.a % 33.5% 6.6% 28.3% 26.5% 7.% P/E 6 n/a n/a Dividend Yield 3.8 n/a 4.2 n/a Moody's Souvereign Raing Baa A2 Baa2 A3 Baa2 A2 Nominal GDP in 2003 (US$bn) GDP per Capia (US$),30 6,700 8,070 3,400 8,700 9,630 Real GNP change in % Inflaion Rae (CPI % change) n/a Curren accoun balance/gdp in % Exernal vulnerabiliy indicaor Noe : The economic daa was provided by SHUAA Capial, Dubai. The sock marke relaed daa was provided in par by he Arab Moneary Fund and he individual sock marke organizaions. GCC naionals only 2 In Bahrain, seven companies (mosly banks) are open o 00% foreign ownership which is oherwise resriced o 49%. Kuwai does no allow non-gcc ciizens o inves direcly in he sock marke and Saudi Arabia makes only bank shares available o GCC ciizens. In he UAE, non-naionals can buy up o 20% of Emaar and 49% of Tabreed shares, whereas in Qaar, GCC ciizens can buy up o 25%. However, while ownership in bank and financial services companies is resriced o Qaar naionals, non-gcc ciizens can inves in Qaar Telecom and Salam Inernaional. 3 Balances are available afer one day; general selemens beween all paries every Saurday. 4 A raio used by Moody's ha measures a counry's abiliy o cover is mauring deb only hrough is reserves, compued as: (Shor Term Deb + Mauring Porion of Long Term Deb)/ Foreign Exchange Reserves

19 Table 2: Uni Roo Tess ADF, PP, and KPSS denoe he Augmened Dickey-Fuller es, Philips-Perron es, and he Kwiakowski, Phillips, Schmid, and Shin es for uni roos, respecively. The opimal number of lags was chosen according o he Schwarz Informaion Crierion (SIC), provided ha he lags yield whie-noise residuals. Levels: Firs Differences: Markes Period ADF PP KPSS ADF PP KPSS Bahrain -2.80* -2.89* 0.33*** -7.06*** -7.58*** ** -4.47*** -7.98*** 0.05 Kuwai *** -7.56*** -7.64*** *** -8.79*** -9.44*** 0.4 Oman *** -9.97*** -0.0*** *** -8.2*** -8.9*** 0.5 Qaar *** -9.03*** -9.40*** *** -9.32*** -9.34*** 0.08 Saudi Arabia *** -0.37*** -0.37*** *** -7.4*** -7.36*** 0.3 UAE *** -5.38*** -9.7*** *** -8.2*** -8.43*** 0.05 UK ** -9.98*** -9.93*** *** -4.67*** -6.49*** 0.25 US *** -2.26*** -2.34*** *** -3.93*** -4.86*** 0.6 *, **, and *** denoe saisical significance a he 0%, 5% and % level, respecively.

20 Table 3: Descripive Saisics of Weekly Reurns Full Period: /2000-9/2004, n = 247 Bahrain Kuwai Oman Qaar Saudi Arabia UAE UK US Mean Median Maximum Minimum Sd. Dev Skewness Kurosis CV Firs Period: /2000-6/2002, n = 30 Bahrain Kuwai Oman Qaar Saudi Arabia UAE UK US Mean Median Maximum Minimum Sd. Dev Skewness Kurosis CV Second Period: 7/2002-9/2004, n = 7 Bahrain Kuwai Oman Qaar Saudi Arabia UAE UK US Mean Median Maximum Minimum Sd. Dev Skewness Kurosis CV

21 Table 4: Mulivariae Coinegraion Resuls The number of coinegraion vecorsr is shown as well as criical values for race (λrace ) and maximum eigenvalue λmax ) saisics. The criical values are aken from Oserwald-Lenum (992). Firs Period: /2000-6/2002 Wihou Linear Trend Trace λrace λrace Eigenvalue λmax λmax H 0 Tess H 0 Tess r = r = r r = r r = r r = Wih Linear Trend Trace λrace λrace Eigenvalue λmax λmax H 0 Tess H 0 Tess r = ** r = r r = r r = r r = Second Period: 7/2002-9/2004 Wihou Linear Trend Trace λrace λrace Eigenvalue λmax λmax H 0 Tess H 0 Tess r = *** r = ** r 96.3** r = r ** r = r r = Wih Linear Trend Trace λrace λrace Eigenvalue λmax λmax H 0 Tess H 0 Tess r = *** r = r 78.3*** r = r ** r = r r = ** and *** denoe saisical significance a he 5% and % level, respecively.

22 Table 5: Generalized Forecas Error Variance Decomposiion Each enry denoes he oal percenage of forecas error variance of a paricular marke explained by he sum of index variances of all oher markes. The "marke explained" is excluded from he decomposion. By Innovaions in: Marke Number of GCC UK US Explained Weeks /00-6/02 7/02-9/04 /00-6/02 7/02-9/04 /00-6/02 7/02-9/ Bahrain Kuwai Oman Qaar Saudi Arabia UAE

23 Table 6: Generalized Forecas Error Variance Decomposiion Firs Period: /2000-6/2002, week 4 Marke By Innovaions in: Explained Bahrain Kuwai Oman Qaar Saudi Arabia UAE Bahrain Kuwai Oman Qaar Saudi Arabia UAE GCC Second Period: 7/2002-9/2004, week 4 Marke By Innovaions in: Explained Bahrain Kuwai Oman Qaar Saudi Arabia UAE Bahrain Kuwai Oman Qaar Saudi Arabia UAE GCC Represens he average error variance in he GCC sock markes explained by innovaions in he paricular counry.

24 Table 7: Impulse Response Analysis Firs Period: /2000-6/2002 Marke To one S.D. Impulse in: Responding week Bahrain Kuwai Oman Qaar Saudi Arabia UAE UK US Bahrain Kuwai Oman Qaar Saudi Arabia UAE Second Period: 7/2002-9/2004 Marke To one S.D. Impulse in: Responding week Bahrain Kuwai Oman Qaar Saudi Arabia UAE UK US Bahrain Kuwai Oman Qaar Saudi Arabia UAE

25 Table 8: Granger Causaliies Firs Period: /2000-6/2002 Null Hypohesis: Obs F-Saisic Probabiliy Oman does no Granger Cause Bahrain Bahrain does no Granger Cause Oman** Saudi Arabia does no Granger Cause Oman** Oman does no Granger Cause Saudi Arabia Saudi Arabia does no Granger Cause Qaar*** Qaar does no Granger Cause Saudi Arabia UK does no Granger Cause Kuwai*** Kuwai does no Granger Cause UK US does no Granger Cause Bahrain*** Bahrain does no Granger Cause US US does no Granger Cause Kuwai*** Kuwai does no Granger Cause US US does no Granger Cause Saudi Arabia*** Saudi Arabia does no Granger Cause US US does no Granger Cause UK*** UK does no Granger Cause US Second Period: /2000-6/2002 Null Hypohesis: Obs F-Saisic Probabiliy Oman does no Granger Cause Bahrain Bahrain does no Granger Cause Oman** UAE does no Granger Cause Oman** Oman does no Granger Cause UAE Saudi Arabia does no Granger Cause Qaar** Qaar does no Granger Cause Saudi Arabia Noe : Only he counry pairs ha displayed 5%-level (**) or %-level significance (***) are shown in his able.

26 Table 9: Tes of Equaliy of Correlaion Coefficiens Firs Period: /2000-6/2002 Bahrain Kuwai Oman Qaar Saudi Arabia UAE UK Kuwai 0.32 Oman Saudi Arabia Qaar UAE UK US Second Period: 7/2002-9/2004 Bahrain Kuwai Oman Qaar Saudi Arabia UAE UK Kuwai 0.3 Oman Saudi Arabia Qaar UAE UK US Difference in Correlaion Coefficiens Bahrain Kuwai Oman Qaar Saudi Arabia UAE UK Kuwai -0.9 (-.52) Oman * (-0.35) (.70) Qaar (-.46) (-0.50) (.58) Saudi Arabia -0.30** (-2.38) (-0.9) (-0.06) (0.34) UAE * (0.69) (0.4) (0.48) (0.) (.88) UK (-0.83) (.) (0.76) (0.5) (0.52) (-0.72) US * 0.7*** (-0.29) (.6) (0.59) (0.56) (-0.05) (-.68) (3.27) *Indicaes an increase or decrease in correlaion coefficen in he second period ha is significan a he 0%-level. **Indicaes an increase or decrease in correlaion coefficen in he second period ha is significan a he 5%-level. ***Indicaes an increase or decrease in correlaion coefficen in he second period ha is significan a he %-level.