Connectedness of the Sectoral Equity Returns in the GCC

In this paper, we examine intra-regional patterns of return spillovers between economic sectors of GCC over the period from 2007 to 2021. First, we investigate the connectedness of sectoral equity returns and explore the different patterns and magnitudes. Second, we also find out possible determinants of sectoral equity return spillovers. We identify that spillovers are regime dependant increasing their intensity during turmoil periods such as 2007-2008 crisis, 2011-2012 European sovereign crisis, 2014 oil price crash and 2020 COVID-19 pandemic. The level of contagion is the highest in the financials sector and the lowest in the energy sector. In general, Bahrain and Oman are segmented from other markets in all sectors. In line with the literature, the liquidity and profitability positions are highly affecting the extent of the spillovers which are highly dispersed across sectors. Particularly, the return spillovers are negatively affected by net debt/asset ratio and positively affected by interest expense coverage and profitability ratios namely profit margin and ROA. Sectors highly proftiable and have less liquiidty issues are net transmitter of the shocks to other sectors. Our findings confirm the heterogeneity of sectoral spillover returns and portfolio managers can monitor the magnitude of the spillovers by controlling the financial performance of the firms and guide their investment decisions accordingly