Commodities risk premia and regional integration in gas-exporting countries

Abstract

This study examines the fundamental driving forces of stock market integration with particular emphasis on major Gas-Exporting Countries (hereafter known as GECs), namely the United Arab Emirates, Qatar, Venezuela, Saudi Arabia, Russia, and Kuwait, over the period from June 2003 to November 2017. The novelty of our study stems from the fact that we examine a dynamic process of international, regional and national stock markets integration using a set of local, regional, global and commodities as driving forces of integration. Particularly, we measure market integration using gas price as a common source of risk in addition to the world, regional and domestic sources of risk based on a conditional version of the International Capital Asset Pricing Model (ICAPM). Our study also differs from past ones in that we investigate the integration of stock markets into the international market as well as in the GECs countries. Our results show that the level of market integration of the major gas-exporting countries varies widely over time and depends on the interest rate spread, the level of market openness and market volatility. It also seems to be still significantly segmented from both the global and GECs markets. Gas risk represents a small part of the global risk in all the countries considered in this study.