Is there a diversification benefit from investing in the Arab Gulf stock markets? A multivariate GARCH analysis

This paper examines the degree to which four emerging stock markets in the Arab Gulf countries (Bahrain, Kuwait, Oman and Saudi Arabia) are regionally linked and the implications of this on portfolio diversification and hedging strategies. We find that conditional heteroscedasticity is present in all these markets and also that conditional volatility responds asymmetrically to past shocks. In order to properly take account of these phenomena we estimate a multivariate vector autoregressive exponential GARCH (MVAR-EGARCH) model to measure the links among the markets. The empirical findings provide evidence of spillover effects in both mean and variance between the Gulf stock markets. In addition, the asymmetric nature of volatility transmission suggests that investors in these markets react more to adverse invocations than positive shocks. These results have significant implications for portfolio management and hedging strategies in these markets.