Dependence patterns across Gulf Arab stock markets: a copula approach

Syed Abul, Basher and Salem, Nechi and Hui, Zhu (2014): Dependence patterns across Gulf Arab stock markets: a copula approach.

Abstract

Underpinned by rising hydrocarbon revenues, the stock markets of the six GCC (Gulf Cooperation Council) countries have demonstrated significant integration over the past decade. This paper studies the dependence patterns of the bivariate distribution of returns across seven GCC stock markets over the period 2004-2013 using copula models. The results of the marginal models indicate strong volatility persistence in all the seven equity markets. The results from the copula models indicate that the conditional dependence across all 21 pairs of equity markets’ returns is not strictly symmetric in that the lower tail dependence is significantly greater that the upper tail dependence. The stock markets of Abu Dhabi and Dubai appear as the primary source of asymmetric dependence across the different equity market pairs.

• Item Type: MPRA Paper
• Language: English
• Keywords: Copula, tail dependence, GCC stock markets.
• Subjects: G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets

References

Abdmoulah, W. (2010) Testing the evolving efficiency of Arab stock markets. International Review of Financial Analysis 19, 25–34.

Al-Deehani, T. and Moosa, I.A. (2006) Volatility spillover in regional emerging stock markets. A structural time series approach. Emerging Markets Finance and Trade 42, 78–89.

Al-Khazali, O., Darrat, A.F. and Saad, M. (2006) Intra-regional integration of the GCC stock markets: the role of market liberalization. Applied Financial Economics 16, 1265–1272.

Alkulaib, Y.A., Najand, M. and Mashayekh, A. (2009) Dynamic linkages among equity markets in the Middle East and North African countries. Journal of Multinational Financial Management 19, 43–53.

Ang, A. and Chen, J. (2002) Asymmetric correlations of equity portfolios. Journal of Financial Economics 63, 443–494.

Ang, A., Chen, J. and Xing, Y. (2006) Downside risk. Review of Financial Studies 19, 1191–1239.

Arouri, M.E.H. and Nguyen, D.K. (2010) Time-varying characteristics of cross-market linkages with empirical application to Gulf stock markets. Managerial Finance 36, 57–70.

Assaf, A. (2003) Transmission of stock price movements: the case of GCC stock markets. Review of Middle East Economics and Finance 1, 171–189.

Awartani, B. and Maghyereh, A.I. (2013) Dynamic spillovers between oil and stock markets in the Gulf Cooperation Council countries. Energy Economics 36, 28–42.

Bai, J. and Ng, S. (2005) Tests for skewness, kurtosis, and normality for time series data. Journal of Business & Economic Statistics 23, 49–60.

Balcilar, M., Demirer, R. and Hammoudeh, S. (2013a) Investor herds and regime-switching: evidence from Gulf Arab stock markets. Journal of International Financial Markets, Institutions & Money 23, 295–321.

Balcilar, M., Demirer, R. and Hammoudeh, S. (2013b) Regional and global spillovers and diversification opportunities in the GCC-wide equity sectors across market regimes. Presented in the Allied Social Sciences Association 2014 Annual Meeting, Philadelphia.

Balli, F., Jean Louis, R. and Osman, M. (2009) International portfolio inflows to GCC markets. Are there any general patterns? Review of Middle East Economics and Finance 5. Article 3.

Balli, F., Basher, S.A. and Jean Louis, R. (2013) Sectoral equity returns and portfolio diversification opportunities across the GCC region. Journal of International Financial Markets, Institutions & Money 25, 33–48.

Bley, J. and Chen, K.H. (2006) Gulf Cooperation Council (GCC) stock markets: the dawn of a new era. Global Finance Journal 17, 75–91.

Bollerslev, T. (1986) Generalized autoregressive conditional heteroskedasticity. Journal of Econometrics 31, 307–327.

Bollerslev, T. (1987) A conditionally heteroskedastic time-series models for security prices and rates of return data. Review of Economics and Statistics 69, 542–547.

Boubaker, H. and Sghaier, N. (2013) Instability and time-varying dependence structure between oil prices and stock markets in GCC countries. Working Paper Series 2013-23. IPAG Business School, Paris.

Chau, F., Deesomsak, R. and Wang, J. (2014) Political uncertainty and stock market volatility in the Middle East and North African (MENA) countries. Journal of International Financial Markets, Institutions & Money 28, 1–19.

Chollete, L., Heinen, A. and Valdesogo, A. (2009) Modeling international financial returns with a multivariate regime-switching copula. Journal of Financial Econometrics 7, 437–480.

Demirer, R. (2013) Can advanced markets help diversify risks in frontier stock markets? Evidence from Gulf Arab stock markets. Research in International Business and Finance 29, 77–98.

Espinoza, R., Prasad, A. and Williams, O. (2011) Regional financial integration in the GCC. Emerging Markets Review 12, 354–370.

Giacomini, E., Härdle, W. and Spokoiny, V. (2009) Inhomogeneous dependence modeling with time-varying copulae. Journal of Business & Economic Statistics 27, 224–234.

Hammoudeh, S.M., Yuan, Y. and McAleer, M. (2009). Shock and volatility spillovers among equity sectors of the Gulf Arab stock markets. Quarterly Review of Economics and Finance 49, 829–842.

Hong, Y., Tu, J. and Zhou, G. (2007) Asymmetries in stock returns: statistical tests and economic evaluation. Review of Financial Studies 20, 1547–1581.

Hu, L. (2006) Dependence patterns across financial markets: a mixed copula approach. Applied Financial Economics 16, 717–729.

Hwang, S. and Satchell, S.E. (1999) Modelling emerging market risk premia using higher moments. International Journal of Finance and Economics 4, 271–296.

Joe, H. (1997) Multivariate Models and Dependence Concepts. London: Chapman & Hall.

Jondeau, E., Poon, S.-H. and Rockinger, M. (2007) Financial Modeling Under Non-Gaussian Distributions. Springer, London.

Kearney, C. and Lucey, B.M. (2004) International equity market integration: theory, evidence and implications. International Review of Financial Analysis 13, 571–583.

KAMCO (2012) GCC equity market review (December 2011). January 12, 2012. KAMCO Research. http://www.kamconline.com/NewsDetails.aspx?newsId=44080&language=en

Khamis, M. and Senhadji, A. et al. (2010) Impact of the global financial crisis on the Gulf Cooperation Council countries and challenges ahead. Middle East and Central Asia Department. International Monetary Fund, Washington, DC.

Kim, T. H. and White, A. (2004) On more robust estimation of skewness and kurtosis: simulation and application to the S&P500 index. Finance Research Letters 1, 56–70.

Knight, J., Lizieri, C. and Satchell, S. (2005) Diversification when it hurts? The joint distribution of real estate and equity markets. Journal of Property Research 22, 309–323.

Longin, F., Solnik, B. (2001) Extreme correlation of international equity markets. Journal of Finance 56, 649–676.

Maghyereh, A. and Awartani, B. (2012) Return and volatility spillovers between Dubai financial market and Abu Dhabi stock exchange in the UAE. Applied Financial Economics 22, 837–848.

Marashdeh, H.A. and Shrestha, M.B. (2010) Stock market integration in the GCC countries. International Journal of Finance and Economics 37, 102–114.

McKinsey Global Institute (2009) Global Capital Markets: Entering a New Era. September 2009.

Naifar, N. and Al Dohaiman, M.S. (2013) Nonlinenar analysis among crude oil prices, stock markets’ return and macroeconomic variables. International Review of Economics and Finance 27, 416–431.

Nechi, S. (2010) Assessing economic and financial cooperation and integration among the GCC countries. Journal of Business and Policy Research 5, 158–178.

Nelson, D.B. and Cao, C.Q. (1992) Inequality constraints in the univariate GARCH model. Journal of Business & Economic Statistics 10, 229–235.

Ning, C. (2010) Dependence structure between the equity market and the foreign exchange market – A Copula approach. Journal of International Money and Finance 29, 743–759.

Patton, A.J. (2006) Modelling asymmetric exchange rate dependence. International Economic Review 47, 527–556.

Rao, A. (2008) Analysis of volatility persistence in Middle East emerging equity markets. Studies in Economics and Finance 25, 93–111.

Ravichandran, K. and Maloain, A.M. (2010) Global financial crisis and stock market linkages: further evidence on GCC market. Journal of Money Investment and Banking 16, 46–56.

Shiller, R.J. (2001) Bubbles, human judgment, and expert opinion. Cowles Foundation Discussion Paper No. 1303. Yale University.

Sklar, A. (1959) Fonctions de repartition à n dimensions et leurs marges. Publications de l’ Institut Statistique de l’Universite de Paris 8, 229–31.

Sklar, A. (1973) Random variables, joint distributions, and copulas. Kybernetica 9, 449–460.

Simpson, J. (2008) Financial integration in the GCC stock markets: evidence from the early 2000s development phase. Journal of Economic Cooperation 29, 1–28.

Sun, W., Rachev, S., Fabozzi, F.J. and Kalev, P.S. (2009) Unconditional copula-based simulation of tail dependence for co-movement of international equity markets. Empirical Economics 36, 201–229.

Trivedi, P.K. and Zimmer, D.M. (2010) Copula modeling: an introduction for practitioners. Foundations and Trends in Econometrics 1, 1–111.

Yang, L. and Hamori, S. (2013) Dependence structure among international stock markets: A GARCH–copula analysis. Applied Financial Economics 23, 1805–1817.