An Empirical Study on Co-Integration and Causality Among GCC Stock Markets

Research Question: This research attempts to explain the integration hypothesis in both short term and long term causal relationship in the Gulf Cooperation Council countries (GCC) stock markets. Motivation: GCC comprises some of the fastest growing economies in the world, mainly due to an increase in oil and natural gas revenues coupled with a construction and investment boom backed by reserves. Though being significant West Asian economies, studies of their stock markets have limited presence in academic literature. Hence, an attempt is made to establish interdependency among six GCC economies as not only they are culturally similar but also their energy dependency is unique geographically. The current study extends the work of Hysaj and Sevil (2021), Matar et al. (2021), Assraf (2003), to incorporate daily movement in the stock markets of these countries especially during the low international crude oil price environment. Idea: The objective is to establish cointegration and dependency among six GCC stock markets. Data: The data set for this study is the official daily market index levels of the Tadawul All Share (TASI) (Saudi Arabia), the Kuwait stock Exchange (Kuwait), the Bahrain Stock Exchange (Bahrain), the Muscat Stock Exchange (Oman), and the Dubai Financial Market (UAE) from 25th January 2011 to 25th January 2018 (1738 observations) collected from individual stock market’s website. Method/Tools: Unit root test and co-integration test are applied to assess the dependency among the time series data. In order to test the existence of relationship among the GCC markets, Vector Error Correction Model (VECM), impulse response function and variance decomposition are applied. Findings: The results obtained establish long run linkages among all the stock markets of GCC and asymmetric short run causality among the six markets. Contributions: This study will help in extending the prevailing literature on integration in various ways and directions particularly from daily movement of stock market indices. This study will also enrich the sparse literature on GCC stock markets and their causal linkages.