Title: Is there a diversification benefit from investing in the Arab Gulf stock markets? A multivariate GARCH analysis

Authors: Aktham Maghyereh, Haitham Al-Zoubi, Sadeq Abderraheem

Addresses: Department of Banking and Finance, The Hashemite University, Zarka-12115, Jordan. ' Department of Banking and Finance, The Hashemite University, Zarka-12115, Jordan. ' Central Bank of Kuwait, P.O. Box 2449200, Safat 13006, Kuwait

Abstract: This paper examines the degree to which four emerging stock markets in the Arab Gulf countries (Bahrain, Kuwait, Oman and Saudi Arabia) are regionally linked and the implications of this on portfolio diversification and hedging strategies. We find that conditional heteroscedasticity is present in all these markets and also that conditional volatility responds asymmetrically to past shocks. In order to properly take account of these phenomena we estimate a multivariate vector autoregressive exponential GARCH (MVAR-EGARCH) model to measure the links among the markets. The empirical findings provide evidence of spillover effects in both mean and variance between the Gulf stock markets. In addition, the asymmetric nature of volatility transmission suggests that investors in these markets react more to adverse invocations than positive shocks. These results have significant implications for portfolio management and hedging strategies in these markets.

Keywords: market interdependence; diversification; volatility; GARCH model; Gulf financial markets; Arabian Gulf; Bahrain; Kuwait; Oman; Saudi Arabia; stock markets; conditional heteroscedasticity.

DOI: 10.1504/GBER.2005.008293

Global Business and Economics Review, 2005 Vol.7 No.4, pp.324 - 342

Published online: 30 Nov 2005 *

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