Financial Integration of GCC Capital Markets:Evidence of Nonlinear Cointegration

Onour, Ibrahim (2008): Financial Integration of GCC Capital Markets:Evidence of Nonlinear Cointegration. Published in: Afro-Asian Journal of Finance and Accounting , Vol. 1, No. 3 : pp. 251-265.

Abstract

This paper employs a nonparametric test to investigate nonlinearity in the long-run equilibrium relationship between GCC stock markets returns. The results in the paper show strong evidence of bivariate and multivariate cointegration between five of GCC stock markets. However, Bahrain stock market is evidenced segmented from the group of GCC markets. It is indicated that there is bivariate nonlinear cointegrating relationship linking Kuwait stock market with each of Saudi, and Dubai markets. Nonlinearity also realized between Saudi market and each of Dubai and Abu-Dhabi markets, as well as between Muscat and Kuwait stock markets.

• Item Type: MPRA Paper
• Language: English
• Keywords: Cointegration;nonlinear,unit roots
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods: General > C10 - General; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C50 - General; G - Financial Economics > G1 - General Financial Markets > G10 - General

References

Breitung J., and Gourieroux, C., (1997) “ Rank Test for Unit Roots” Journal of Econometrics, Vol.81, pp.7-27.

Breitung J., (2001, July) “Rank Test for Nonlinear Cointegration” Journal of Business & Economic Statistics, Vol. 19, no.3, pp. 331-340.

DeJong, D.; Nankervis, J.; Savin, N.; and Whiteman, C.; (1992a) “Integration Versus Trend Stationarity in Macroeconomic Time Series” Econometrica, 60, 423-434.

Dicky, D.A; and Fuller W.A; (1981) “Liklihood Ratio Statistics For Autoregressive Time Series With a Unit Root”, Econometrica, Vol 49, pp. 1057 1072.

Dicky, D.A; and Fuller W.A; (1979) “Distribution of the Estimators for Autoregressive Time Series With a Unit Root” Journal of American Statistical Association, 74, 427-431.

Eun C.; Shim S.; (1989) “International Transmission of Stock Market Movements” Journal of Financial and Quantitative Analysis, 24, 241- 256.

Johansen, S., and Juseilus, K., (1990) “Maximum Liklihood Estimation and Inference On Cointegration – With Application to The Demand For Money, Oxford Bulletin of Economics and Statistics,52,169-210.

King M.; and Wadhwani S.; (1990) “Transmission of Volatility Between Stock Markets” Review of Financial Studies, 3, 5-33.

Kwiatkowski, D.; Phillips, P.; Schmidt, P.; and Shin, Y.; (1992) “ Testing the Null Hypothesis of Stationarity Against the Alternatives of a Unit Root: How Sure Are We That Economic Time Series Have a Unit Root?” Journal of Econometrics, 54, 159-178

Lee, S.; and Kim, K.; (1993), Does the October 1987 Crash Strengthen the Co-movments among National Stock Markets ?”, Review of Financial Economics, 3, 89 – 102.

Lee, T., White H., and Granger C., (1993) “Testing for Neglected Nonlinearity in Time Series Models: A Comparison of Neural Network Methods, and Alternative Tests” Journal of Econometrics, Vol.56, pp. 269-290.

Longin, F.; and Solnik, B.; (1995) “Is Correlation in International Equity Returns Constant: 1960 – 1990” Journal of International Money and Finance, 14, 3 – 26.

Longin, F.; and Solnik, B.; (2001) “Extreme Correlation of International Equity Markets” Journal of Finance,56, 649-676

Mackinnon J., Haug A. and Michelis L. (1999) “Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration” Journal of Applied Econometrics, Vol.,14, pp. 563-577.

Masih A.; Masih R.; (1997) “Dynamic Linkages and the Propagation Mechanism Driving Major International Stock Markets” Quarterly Review of Economics and Finance, 37, 859-885.

Ng, S.; Perron, P.; (1993b), Unit Root Tests in ARMA Models with Data Dependent Methods for The Selection of the Truncation Lag, (Manuscript), C.R.D.E., University of Montreal, Quebec. Hamao, Y.; Masulis; and Ng, V.; (1989) “ Correlation in Price Changes and Volatility a Cross International Stock Markets”, Review of Financial Studies, 3, 281-307.

Granger C., Hallman, J. (1991) “Nonlinear Transformations of Integrated Time Series” Journal of Time Series Analysis, Vol.,12, pp. 207-224.

Green, W.;(1993): Econometric Analysis, 2nd Edition, Macmillan. Roll, R.; (1989) “The International Crash of October, 1987” Financial Analysis Journal, 44, 19 – 35.

Rigobon, R.; (2001) “Contagion: How to Measure It ?”, Working Paper 8118, NBER.

Rigobon, R.; (2002) “On the International Propogation Of Shocks: Is It Stable ?” Journal of International Economics, Forthcoming.

Schmidt, P., Phillips, P., (1992) “LM Test for a Unit Root in the Presence of Deterministic Trends” Oxford Bulletin of Economics and Statistics, Vol. 54, pp. 256-287.

Phillips, P.(1988) “Trends and Random Walks In MacroeconomicTime Series” Journal of Economic Dynamics and Control, Vol.12, pp. 297 332.

Phillips, P., (1987) “ Time Series Regression With a Unit Root” Econometrica, Vol 55, pp. 277 301.

Tuluca S.; Zwick B.; (2001) “The Effects of the Asian Crisis on Global Equity Markets” Financial Review, 36, 125-142.

Whistler, D.; White, K.; Wong, D.; and Bates, D.,: Shazam Software, and Users Reference Manual, Version 10, Northwest Econometrics, Ltd.