Time‐varying characteristics of cross‐market linkages with empirical application to Gulf stock markets

Abstract

Purpose

The purpose of this paper is to propose an empirical procedure for examining the time‐varying features of cross‐market correlations in selected Gulf stock markets.

Design/methodology/approach

The paper directly infers the cross‐market linkages from the stock data using a multivariate dynamic conditional correlation GARCH model (DCC‐GARCH). The paper attempts to date the structural breaks in the time‐paths of the conditional correlation indices to investigate whether the cross‐market comovement encompasses significant changes in nature or not.

Findings

Conditional cross‐market correlations between studied markets are shown to be time‐varying, past‐dependent and subject to structural breaks. However, the comovements are still small within the Gulf region and insignificant between the Gulf stock markets and the world market.

Research limitations/implications

Even though the paper attempted to relate the observed changes in market linkages to major economic and political events that the Gulf region experienced during the sample period, a more careful, in‐depth analysis is needed since the primary objectives of this paper consist only of measuring stock market comovements and detecting their possible structure changes.

Practical implications

For global investors, there is still room for international and regional diversification in Gulf markets, given the low degree of comovements documented in the study.

Originality/value

The application of the DCC‐GARCH model and structural change test in a linear framework appears to be suitable for studying the time‐varying properties of cross‐market linkages between markets in the Gulf region. It also provides information about the degree of financial integration of the studied markets with the world stock market through an analysis of the conditional correlation coefficients.

Citation

El Hedi Arouri, M. and Khuong Nguyen, D. (2010), "Time‐varying characteristics of cross‐market linkages with empirical application to Gulf stock markets", Managerial Finance, Vol. 36 No. 1, pp. 57-70. https://doi.org/10.1108/03074351011006847