Financial Integration in the GCC Region: Market Size Versus National Effects

This paper examines financial spillovers between the four largest equity markets (bymarket capitalization) in the GCC region using a VAR-GARCH (1,1) framework thatsheds light on interdependence as well as the effects of the 2014 oil crisis. Since theUAE is a federation including two stock exchanges (Abu Dhabi and Dubai), it is pos-sible to test whether being part of a federal union matters more than market size interms of financial integration. Our results suggest that the latter is more important,since we could not find evidence of stronger linkages between the Abu Dhabi andDubai markets compared to those between other markets in the region. By contrast,there are significant spillover effects, both in the mean and in the volatility, fromthe largest market of Saudi Arabia to Qatar and the two markets in the UAE, whichconfirms that market capitalization is a more important determinant of financial inte-gration than belonging to a federal union. Further, spillovers from the larger marketshave become stronger as a result of the 2014 oil crisis. Finally, there is also evidenceof spillovers from the smaller to the larger markets