5 Gulf Countries and Integration of Stock Makets

Investigating the Bilateral Integration of Five GCC Financial Markets

Introduction to the Investigation of Bilateral Integration

The purpose of this study was to establish the level of integration that exists (a) among GCC financial markets and (b) between GCC financial markets and major international markets. The specific focus of this chapter is the investigation of bilateral integration among five GCC financial markets.

The five GCC financial markets included in the analyses represent five GCC states Bahrain, Kuwait, Oman, Qatar, and Saudi Arabia. The five GCC financial markets subjected to analysis are as follows:

Bahrain Stock Exchange (BSE): Bahrain

Muscat Securities market (MSM): Oman

Saudi Stock Market (SSM): Saudi Arabia

Scope and Method of the Investigation

Four statistical procedures were applied in the investigation of the bilateral integration of the five GCC financial markets. The statistical procedures were as follows:

Correlation Analysis: Correlation matrices were developed for each of the 10 bilateral pairs among the five GCC financial markets analyzed

Augmented Dickey-Fuller Test: Augmented Dickey-Fuller tests were performed to establish the stationarity (determination of the presence of unit roots) of the data for each of the five GCC financial markets

Johansen Co-Integration Test: Johansen Co-Integration tests were performed for each of the 10 bilateral pair

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e with the concept of stock market integration, which assumes a similarity in securities offerings and the ability of investors from each market to hold investment in all securities. The findings of the Johansen Co-Integration Test of the Bahrain and Saudi Arabia stock markets are consistent with the finding of the correlation analysis involving these two stock markets. Chart 3-15: Johansen Co-Integration Test Kuwait-Oman (Muscat) Critical Values Vector/H0 Decision r test Statistic p .20 p .10 p .05 Vector 0 12.7 11.6 13.6 15.8 H0 Decision Reject Accept Accept Vector 1 2.9 5.9 7.6 9.1 H0 Decision Accept Accept Accept Conclusion: r = 0; no co-integration exists The Johansen Co-Integration Test outcome indicated that no co-integration exists between the Kuwait stock market and the stock market in Oman-Muscat. The correlation analysis showed that the relationship between movements in the two stock markets was positive but weak. Positive co-integration is compatible with the concept of stock market integration, which assumes a similarity in securities offerings and the ability of investors from each market to hold investment in all securitie

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