Global and Regional Volatility Spillovers to GCC Stock Markets

Alotaibi, Abdullah R and Mishra, Anil V (2015): Global and Regional Volatility Spillovers to GCC Stock Markets. Published in: Economic Modelling , Vol. 45, (1 February 2015): pp. 38-49.

Abstract

This paper examines the effects of return spillovers from regional (Saudi Arabia) and global (US) markets to GCC stock markets (Bahrain, Oman, Kuwait, Qatar, United Arab Emirates). The paper develops various bivariate GARCH models for regional and global returns: BEKK, constant correlation and dynamic correlation. The specification tests are used to choose between the models with and without asymmetric effects. The estimated innovations for the regional and global returns are then used as input for the univariate volatility spillover model which allows the unexpected returns of any particular GCC stock market be driven by three sources of shocks: local, regional from Saudi Arabia and global from US. We find significant return spillover effects from Saudi Arabia and US to GCC markets. Trade, turnover and institutional quality has significant impacts on regional volatility spillovers from Saudi Arabia to GCC markets. There are macroeconomic policy implications associated with the strengthening of intra-regional and cross-border trade in goods, services and assets and regulatory framework.

• Item Type: MPRA Paper
• Language: English
• Keywords: Volatility spillovers; GCC stock markets; GARCH; BEKK; CCC; DCC
• Subjects: F - International Economics > F3 - International Finance

References

Abraham, A., Seyyed, F., 2006. Information transmission between the Gulf Equity markets of Saudi Arabia and Bahrain. Res. Int. Bus. Finance 20(3), 276–285.

Arellano, M., Bover, O., 1995. Another look at the instrumental variable estimation of error-components models. J. Econ. 68, 29–51.

Arouri, M., Nguyen, D., 2010. Stock returns and oil price fluctuations: short and long-run analysis in the GCC context. Int. J. Glob. Energy Issues 33(3/4), 121–138.

Assaf, A., 2003. Transmission of stock price movements: the case of GCC stock markets. Rev. Middle East Econ. Finance 1(2), 73–92.

Baba, Y., Robert, E., Kraft, D., Kroner, K., 1989. Multivariate Simultaneous Generalized ARCH. Discussion paper 89–57. University of California, San Diego.

Baele, L., 2005. Volatility spillover effects in European equity markets. J. Financial Quant. Anal. 40, 373–401.

Balcilar, M., Demirer, R., Hammoudeh, S., 2013. Investor herds and regime switching: evidence from Gulf Arab stock markets. J. Int. Financial Mark. Instit. Money 23, 295–321.

Balli, F., Basher, S.A., Louis R.J., 2013. Sectoral equity returns and portfolio diversification opportunities across the GCC region. J. Int. Financial Mark. Inst. Money. 25, 33–48.

Beirne, J., Caporale, G., Schulze-Ghattas, M., Spagnolo, N., 2010. Global and regional spillovers in emerging stock markets: a multivariate GARCH-in-mean analysis. Emerg. Mark. Rev. 11(3), 250–260.

Bekaert, G., Harvey, C., 1997. Emerging equity market volatility. J. Financial Econ. 43, 29–77.

Black, F., 1976. Studies of Stock Price Volatility Changes. Proceedings of the Business and Economics Section of the American Statistical Association, 177–181.

Blundell, R., Bond, S., 1998. Initial conditions and moment restrictions in dynamic panel-data models. J. Econ. 87, 115–143.

Bollerslev, T., 1986. Generalized autoregressive conditional heteroskedasticity. J. Econ. 72, 307–327.

Bollerslev, T., 1990. Modeling the coherence in short-run nominal exchange rates: a multivariate generalized ARCH model. Rev. Econ. Stat. 72, 498–505.

Bollerslev, T., Engle, R., Wooldridge, J., 1988. A capital asset pricing model with time varying covariances. J. Political Economy 96, 116–131.

Cashin, P., Mohaddes, K., Raissi, M., 2012. The global impact of systemic economies and MENA business cycles. IMF, WP/12/255.

Chiang, S., Chen, H., Lin, C., 2013. The spillover effects of the sub-prime mortgage crisis and optimum asset allocation in the BRICV stock markets. Glob. Finance J. 24, 30–43.

Choudhry, T., 1996. Stock market volatility and the crash of 1987: evidence from six emerging markets. J. Int. Money Finance 15(6), 996–981.

Christofi, A., Pericli, A., 1999. Correlation in price changes and volatility of major Latin American stock markets. J. Multinati. Financial Manag. 9(1), 79–93.

Engle, R., 1982. Autoregressive conditional heteroskedasticity with estimates of UK inflation. Econometrica. 50, 987–1008.

Engle, R., 2002. Dynamic conditional correlation: a simple class of multivariate generalized autoregressive conditional heteroskedasticity models. J. Bus. Econ. Stat. 20(3), 339–350.

Engle, R., Kroner F., 1995. Multivariate simultaneous generalized ARCH. Econom. Theory 11, 122–150.

Engle, R., Lilien, D., Robbins, R., 1987. Estimating time varying risk premia in the term structure: The ARCH-M Model. Econometrica 55, 391–407.

Espinoza, R., Prasad, A., Williams, O., 2011. Regional financial integration in the GCC. Emerg. Mark. Rev. 12, 354–370.

Fratzscher, M., 2002. Financial market integration in Europe: on the effects of the EMU on stock markets. Int. J. Finance Econ. 7, 165–193.

Glick, R., Rose, A.K., 1998. Contagion and Trade: Why are Currency Crises Regional? Federal Reserve Bank of San Francisco Working paper, 98–103.

Glosten, L., Jagannathan, R., Runkle, D., 1993. On the relation between the expected value and the volatility of the nominal excess return on stocks. J. Finance 48, 1779–1802.

Hamao, Y., Masulis, R., Ng, V., 1990. Correlations in price changes and volatility across international stock markets. Rev. Financial Stud. 3, 281–307.

Hammoudeh, S., Aleisa, E., 2004. Dynamic relationships among GCC stock markets and NYMEX oil futures. Contemp. Econ. Policy 22, 250–269.

Hammoudeh, S., Choi, K., 2007. Characteristics of permanent and transitory returns in oil-sensitive emerging stock markets: the case of GCC countries. J. Int. Financial Mark. Instit. Money. 17(3), 231–245.

Hammoudeh, S., Li, H., 2008. Sudden changes in volatility in emerging markets: the case of Gulf Arab stock markets. Int. Rev. Financial Analys. 17(1), 47–63.

Hammoudeh, S., Yuan, Y., McAleer, M., 2009. Shock and volatility spillovers among equity sectors of the Gulf Arab stock markets. Q. Rev. Econ. Finance 49(3), 829–842.

IMF (2012). Country Report No. 12/271. 1–35.

IMF (2012). Country Report No. 12/272. 1–61.

IMF (2013). Country Report No. 13/229. 1–40.

Kanas, A., 1998. Volatility spillovers across equity markets: European evidence. Appl. Financial Econ. 8, 245–256.

Kern, S., 2012. GCC financial markets: long-term prospects for finance in the Gulf region. Deutsche Bank Res., Deutsche Bank AG, Germany, 1–42.

Kim, S., In, F., 2002. The Influence of foreign stock markets and macroeconomic news announcements on Australian financial markets. Pacific-Basin Finance J. 10, 571–582.

Kroner, K.F., Ng, V.K., 1998. Modelling asymmetric comovement of asset returns. Rev. Financial Stud. 11, 817–844.

Lane, P.R., Milesi-Ferretti, G.M., 2008. International investment patterns. Rev. Econ. Stat. 90(3), 538–549.

Lin, W., Engle, R., Ito, T., 1994. Do bulls and bears move across borders? International transmission of stock returns and volatility. Rev. Financial Stud. 7, 507–538.

Malik, F., Hammoudeh, S., 2007. Shock and volatility transmission in the oil, US and Gulf equity markets. Int. Rev. Econ. Finance 16(3), 357–368.

Marashdeh, H., Shrestha, M., 2010. Stock market integration in the GCC counties. Int. Res. J. Finance Econ. 37, 102–114.

Mishra, A.V., 2007. International investment patterns: evidence using a new dataset. Res. Int. Bus. Finance. 21(2), 342–360.

Mukherjee, K., Mishra, R., 2008. Stock Market Integration and Volatility Spillover: India and its Major Asian Counterparts. Munich Personal Re-Pec Archive, MPRA paper 12788, 1–32.

Neaime, S., 2012. The global financial crisis, financial linkages and correlations in returns and volatilities in emerging MENA stock markets. Emerg. Mark. Rev. 13, 268–282.

Nelson, D.B., 1991. Conditional heteroskedasticity in asset returns: a new approach. Econometrica 59, 347–370.

Ng, A., 2000. Volatility spillover effects from Japan and the US to the Pacific-Basin. J. Int. Money Finance 19(2), 207–233.

Press, W., Flannery, B., Tevkolsky, S., Vetterling, W., 1988. Numerical Recipes in C. Cambridge University Press, New York.

Richardson, M., Smith, T., 1993. A test for multivariate normality in stock returns. J. Bus. 66(2), 295–321.

Sedik, T.S., Williams, O.H., 2011. Global and regional spillovers to GCC equity markets. IMF Working paper, WP/11/138.

Standard and Poor 2012. Standard and Poor’s Global Stock Market Factbook. Dow Jones, New York.

Susmel, R., Engle, R., 1994. Hourly volatility spillovers between international equity markets. J. Int. Money Finance 13, 3–25.

Yu, J., Hassan, M., 2008. Global and regional integration of the Middle East and North African (MENA) stock markets. Quarterly Rev. Econ. Finance 48, 482–504.

Zheng, T., Zuo, H., 2013. Reexamining the time-varying volatility spillover effects: a Markov switching causality approach. N. Am. J. Econ. Finance. http://dx.doi.org/10.1016/j.najef.2013.05.001.