Gulf Cooperation Council Market Research Articles

Spillover of volatility among financial instruments: ASEAN-5 and GCC market study.

The research examines a comovement and spillover of volatility among foreign exchange, conventional and shariah stock markets in Association of South East Asian Nation-5 (ASEAN) countries and Gulf Cooperation Council (GCC) countries. Generalized Autoregressive Conditional Heteroskedasticity-Baba, Engle, Kraft and Kroner (GARCH-BEKK) and Dynamic Conditional Correlation (GARCH-DCC) models are used to capture the correlation and transmission volatility of the markets. The overall results show that both the Shariah and the conventional stock indices respond similarly to each country's currency. A bidirectional (two-way relationship) volatility spillover exists only in Malaysia and a unidirectional (one-way relationship) volatility is observed in Indonesia, Singapore, Thailand, and Bahrain. The rest of the markets-the Philippines, Saudi Arabia, and the United Arab Emirates (UAE)-do not have any volatility spillover evidence. Based on DCC outcomes, the conventional and Shariah stock in ASEAN-5 countries and GCC countries reveal the market efficiency, i.e., a positive high conditional correlation. Only Bahrain shows less efficiency than the other countries. It implies no portfolio diversification advantage in conventional and Shariah stock indices. Contrarily, currency and stock (conventional and Shariah) markets provide portfolio diversification benefits for all ASEAN-5 and GCC countries.

Royal family board directors and the level of ESG disclosures in GCC listed firms

PurposeThis study aims to examine the role of royal family members’ board of directors, as a specific aspect of corporate governance, on the firm’s environmental, social and governance (ESG) disclosures. Many firms in the world enjoy special political connections, benefit from tax exemptions and favorable treatments that are largely responsible for their economic endurance and strong performance.Design/methodology/approachThe authors collect data from Thomson Reuters database on Gulf Cooperation Council (GCC)-listed firms for 2010–2018. Royal family board directors’ data is manually collected using a systematic approach to ensure accuracy. Fixed effects’ panel regression model is used to estimate relationships. The authors interact variables to test the moderating effect of board independence and sustainability committee on the influence of royal family board directors.FindingsThis study finds that royal family directors on GCC boards negotiate fewer ESG reporting in firms. While board independence, board gender diversity, sustainability committee and governance committee increase the level of ESG-disclosures in the traditional way of reducing agency costs to stakeholders, this study finds that royal family board members convey beneficial consequences on firms without perceiving the need to disclose their ESG activities. Additionally, these firms do not show a spillover effect from the royal family members on the board’s independence or the existence of a sustainability committee; rather these members use a different channel for protecting and building the business value. These results are robust with respect to controls for company size, leverage, return on assets and growth. Instrumental variables are then introduced in the analysis to perform a sensitivity test.Originality/valueThe study results indicate the need to improve GCC market transparency over supplementary limitations that exist on their corporate governance condition. This may be consequential to regulators, lenders and investors. The results suggest the need to raise awareness of the importance of governance and balancing firms’ financial and social performance in the presence of royal family board directors. Policymakers and governance agencies are responsible for promoting the importance of forming sustainability committees and having a set of performance indicators that measure the effectiveness of their actions.

The impact of COVID-19 on GCC equity and debt markets: Evidence from TVP-VAR estimation

COVID-19 has rapidly evolved into a global pandemic and has strongly impacted financial markets of the world, including the Gulf Cooperation Council (GCC) region. Since the outbreak is unprecedented, there is a need to analyze the effects of the disease on volatility spillovers between equity and bond markets. We empirically investigated the impact of the COVID-19 pandemic on the financial equity and debt markets in the GCC region. We used the TVP-VAR dynamic connectedness approach to measure risk transmission in the GCC market. This study investigated the time-varying behavior of GCC equity and conventional and Islamic debt markets using data from 1 January 2019 to 30 August 2021. The results were also validated by performing a DCC-GARCH analysis to check the shock and spillovers among the GCC markets. We found the persistent shock transmitter roles of equity markets to bond and Sukuk markets in the GCC region, and the total dynamic connectedness increased during the first wave of the COVID-19 pandemic. Overall, the significant level of interconnectedness exists within the GCC markets.

THE SYSTEMIC RISK IN THE GULF COOPERATION COUNCIL COUNTRIES’ EQUITY MARKETS AND BANKING SECTORS: A DYNAMIC COVAR APPROACH

This paper examines the systemic risk and its spillover between banking sectors of the Gulf Cooperation Council (GCC) region using the conditional value-at-risk framework. We construct country-specific banking indices using 11 large banks in the region that are systemically important (SIB). We report evidence of systemic risk spilloversfrom SIBs to the broad-based GCC market indices. The incremental tail spillovers are statistically significant for other domestic banks’ tail risk and inflate the systemic risk of cross-country GCC banks.

THE SYSTEMIC RISK IN THE GULF COOPERATION COUNCIL COUNTRIES’ EQUITY MARKETS AND BANKING SECTORS: A DYNAMIC COVAR APPROACH

This paper examines the systemic risk and its spillover between banking sectors of the Gulf Cooperation Council (GCC) region using the conditional value-at-risk framework. We construct country-specific banking indices using 11 large banks in the region that are systemically important (SIB). We report evidence of systemic risk spilloversfrom SIBs to the broad-based GCC market indices. The incremental tail spillovers are statistically significant for other domestic banks’ tail risk and inflate the systemic risk of cross-country GCC banks.

Slack resources and firm performance: evidence from GCC countries

PurposeManagement research has emphasized the effects of slack resources on the decision-makers’ strategic choices. Behavioral theorists have argued for a positive effect of slack through encouraging search and innovation while agency theorists have emphasized that slack can accentuate the principal–agent problem, which negatively affects firm performance. This paper aims to extend this argument and empirically investigate the separate effects of three types of slack resources (i.e. available, recoverable and potential) on firm performance in an important emerging market, namely, the Gulf Cooperation Council (GCC).Design/methodology/approachThe two-step system generalized method of moments (Sys-GMM) is applied to a panel of 360 firms in the six GCC countries, namely, Kuwait, Saudi Arabia, UAE, Qatar, Oman and Bahrain, over the period between 1999 and 2019.FindingsThe authors find that available and potential slack are both negatively associated with firm performance. The relationship between recoverable slack and performance is quadratic (inverse U-shaped) where recoverable slack improves performance only up to a specific point, but after that level, recoverable slack starts to negatively affect the performance of the firm.Originality/valueThis paper contributes to the literature in three important ways. First, this paper advances a first attempt to differentiate between three separate types of slack on firm performance in the context of the GCC market. Second, this paper empirically investigates the presence of the principal–agent problem in the GCC market and relates it to the ongoing debate on the agency effects of slack resources. Finally, this paper underlines the effects of institutional frameworks and environments on the relationship between slack resources and firm performance.

The Effect of Dividend Policy on Stock Market Price Volatility of Banks in the Gulf Cooperation Council (GCC) Markets:

This study examined the effect of dividend policy on the stock market price volatility of banks in the GCC markets. The study data were obtained from the annual financial reports and accounts of the selected sampled banks. The study used the panel data analysis fixed effect regression model. The findings revealed that dividend yield and dividends payout does not influence the market share price in the GCC market. Therefore, they do not affect the GCC banks’ market share price, thus the findings of the study support the dividend policy irrelevance theory. The study recommends that managers in the GCC banks should focus on and emphasize allocating more funds in investment rather than paying dividends. The findings have important practical implications for the policymakers on dividends in the GCC banks due to unstable and inconsistent trends of dividend payments and making it difficult for shareholders on dividend policy decisions predictions

Risk spillover from crude oil prices to GCC stock market returns: New evidence during the COVID-19 outbreak

In this study, we examine oil price extreme tail risk spillover to individual Gulf Cooperation Council (GCC) stock markets and quantify this spillover’s shift before and during the COVID-19 pandemic. A dynamic conditional correlation generalized autoregressive heteroscedastic (DCC- GARCH) model is employed to estimate three important measures of tail dependence risk: conditional value at risk (CoVaR), delta CoVaR (ΔCoVaR), and marginal expected shortfall (MES). Using daily data from January 2017 until May 2020, results point to significant systemic oil risk spillover in all GCC stock markets. In particular, the effect of oil price systemic risk on GCC stock market returns was significantly larger during COVID-19 than before the pandemic. Upon splitting COVID-19 into two phases based on severity, we identify Saudi Arabia as the only GCC market to have experienced significantly higher exposure to oil risk in Phase 1. Although all GCC stock markets received greater oil systemic risk spillover in Phase 2 of COVID-19, Saudi Arabia and the United Arab Emirates appeared more vulnerable to oil extreme risk than other countries. Our empirical findings reveal that investors should carefully consider the extreme oil risk effects on GCC stock markets when designing optimal portfolio strategies, minimizing portfolio risk, and adopting dynamic diversification process. Policymakers and regulators should also enact awareness, oversight, and action plans to minimize adverse oil risk effects.

Systemic Risk in Gulf Cooperation Council Countries’ Equity Markets and Banking Sectors: A Dynamic Conditional Value-at-Risk Approach

We employ dynamic conditional Value at Risk (CoVaR) technique of Adrian and Brunnermeir (2016) in examining the systemic risk and its spillovers for the Gulf Cooperation Council (GCC) countries during the period of January 2004 to June 2020. To do so, we identify 11 large banks in the region that are systemically important given their size and construct country specific banking indices excluding the systemically important banks (SIBs) listed in that market. We examine the systemic spillovers from SIBs to the broad-based GCC market indices and value-weighted banking indices. Our results show that exclusion of the SIB is crucial in isolating the incremental CoVaR spillovers, otherwise it is simply function of SIB’s conditional VaR. We document that incremental tail spillovers are large just not for the market in which SIB is listed but they also increase the tail risk of other GCC markets. The only country that appear insulated from systemic spillovers is Kuwait, otherwise a systemic shock has the strength and size to increases losses in the GCC market and banking sector that goes unaccounted for using bank-specific VaR.

Is earnings management associated with corporate environmental disclosure?

PurposeThis study aims to investigate the association between corporate environmental disclosure (CED) and earnings management (EM) in a Gulf Cooperation Council (GCC) emerging market, namely, Kuwait.Design/methodology/approachUsing panel data from firms listed on the Kuwaiti stock exchange from 2010 to 2014, this paper applies a fixed-effects model to examine the CED-EM nexus. This analysis was supplemented with estimating a two-stage least-squares (2SLS) model and a generalised method of moment model to address any concerns regarding endogeneity problems.FindingsThe results are suggestive of a significant and negative relationship between CED and EM in Kuwait. This implies that the environmentally responsible managers are less likely to be engaged in EM practices in Kuwait.Research limitations/implicationsThe theoretical implication of the results of this study is that managers in Kuwait seem to use CED as a method to decrease the possibility of any formal or informal actions that could be imposed upon their activities.Originality/valueSo far, a limited number of studies focused on examining the CED-EM nexus internationally. Furthermore, studies carried out to examine the CED-EM link within a GCC market is virtually non-existent. This study, therefore, presents the first empirical analysis of this relationship in Kuwait. Also, this study is of a significant value stemming from the environmental challenges that are facing Kuwait as an oil-reliant economy coupled together with the crucial economic development in Kuwait and its critical contribution to the GCC economy.

HUAWEI AND THE GULF REGION: MARKET OPPORTUNITIES DESPITE THE ONGOING US-CHINA TRADE WAR

This document discusses the Chinese telecommunications firm Huawei and its market opportunities in the Gulf Cooperation Council (GCC) are discussed in comparison to the recent sanctions taken against the firm by the US government and the ongoing US-China trade war. The analysis first offers some background information of the US-China trade war that has been rattling the global financial markets for months. This is followed by the examination of the sanctions taken against Huawei by the US government and the reasons for them. Into this milieu, potential market opportunities for Huawei are explored within the GCC and especially its leading member-state markets such as Saudi Arabia. The observation is made that despite the US sanctions, Huawei is certainly the leading telecommunications equipment provider internationally. These attributes of the firm's business case provide it with the commercial heft necessary in order to convince the GCC and its member-states that it is a safe harbor investment for their 5G network build-out. The recommendation is made that Huawei make price concessions to the GCC and its member states in order to convince them to offer exclusive 5G vendor contracts. This exclusivity in the market would stabilize Huawei's revenues over the long-term.Keywords: GCC Market, US-China Trade War, 5G TechnologiesJEL Classifications: M3, O3DOI: https://doi.org/10.32479/irmm.8206

Dynamic and frequency connectedness across Islamic stock indexes, bonds, crude oil and gold

PurposeThis paper aims to investigate the connectedness of Islamic Stock Markets in five regional financial systems, namely, the United States, the United Kingdom, Europe (EU), GCC (Gulf Cooperation Council) and APAC (Asia-Pacific Countries), and across different asset classes (i.e. bonds, gold and crude oil).Design/methodology/approachThis methodology is inspired by Diebold and Yilmaz (2012) and Barunlik and Krehlik (2017) for performing dynamic variance decomposition network and for studying time–frequency dynamics of connectedness at different frequencies.FindingsResults show that the nature of connectedness over the past decade is time–frequency dynamics. The decomposition of the total volatility spillovers is mostly dominated by the long-run component. Furthermore, dominant regions are the largest contributors of spillover index, with the lowest contribution in the system coming from the GCC market. Results also reveal a slightly higher volatility spillover index of Islamic than conventional equity indexes. Finally, the system that encompasses commodities and Islamic finance instruments, generates the much lower volatility spillover.Originality/valueThe findings have significant implications for portfolio managers who are interested in being able to predict asset returns, as well as for policymakers who are concerned with market stability.

The effect of diversification on risk and return in banking sector

PurposeThe purpose of this paper is to investigate the effect of revenue diversification, non-interest income and asset diversification on the performance and stability of the Gulf Cooperation Council (GCC) conventional and Islamic banking systems.Design/methodology/approachThe authors implement a panel of 69 conventional and Islamic banks listed in six GCC markets over the period of 2003–2015, using the System Generalized Method of Moments methodology.FindingsNon-interest income diversification has a negative impact on GCC banks’ performance, while asset-based diversification affects banks performance positively. However, Investors tend to penalize the value of the banks’ assets, which are highly diversified. Government intervention, lack of competition, legal protection and high control of Central banks on GCC banks’ have positive impact on performance. Contrary to the results on conventional banks, asset diversification adds value to Islamic banks. Overall, both banks’ revenue and non-interest diversification have negative impact on GCC banks’ stability, while asset diversification improves Islamic banks’ stability.Research limitations/implicationsThe analysis is limited to a sample of banks, which are listed in the GCC stock exchanges. The lack of data on private and foreign banks operating in the region made the analysis and, consequently, the results specific to shareholding companies. Also, the authors’ measures of bank stability might not be appropriate to use for Islamic banks, given their banking models implemented.Practical implicationsResearch results provide important implications for regulators, bank managers and policy makers, as to the expected ways to support economic diversification through bank diversification strategies.Originality/valueUnlike related studies, the authors’ sample of homogeneous banks has a market structure that is different from the samples in the literature covering either developed countries or heterogeneous samples from both developed and developing countries. Furthermore, using an efficient econometric methodology, the authors deal with two types of banks: conventional banks and Islamic banks. The research determines which type of bank is more able to benefit from different types of diversification. Unlike previous research, this research explores the sensitivity of the results both to the regulatory environment of the GCC market and to general market conditions.

Corporate governance and risk taking: the role of board gender diversity

Purpose This paper aims to investigate the association between board gender diversity and bank risk taking in an emerging market context. Design/methodology/approach The association between female board directorship and bank risk taking is examined, while controlling for board characteristics, managerial, concentrated, family and government ownership. Two-stage regression with instrumental variables is used for a sample of banks listed in Gulf Cooperation Council (GCC) countries during 2002-2014. Findings Results show that banks with more female board directors invest in less risky positions; the association is attenuated when the regulatory capital is larger, providing protection against risky investments, and female directors tend to invest less in risky asset positions in Islamic banks relative to conventional banks. Practical implications The relevance of the findings stems from the recent initiatives undertaken by the Basel Committee to address deficient corporate governance structures that lead to bank breakdowns and the diversified economy of the fast-growing GCC market, relying on banking services in the aftermath of the oil price drop. Originality/value This paper provides novel evidence on the influence of board gender diversity on bank risk taking in an emerging market context. This paper fills a gap in prior research by examining bank-specific regulatory capital adequacy and Islamic banking aspects.

Xylitol Chewing Gums on the Market: Do They Prevent Caries?

To measure the xylitol content in sugar-free chewing gums available on the market in Gulf Cooperation Council (GCC) countries in the Middle East, in order to identify those products that can provide the recommended daily dose of xylitol for caries prevention (6-7 g). Acid production from chewing gums was also measured in vitro and in vivo. Twenty-one chewing gums containing xylitol were identified and collected from the GCC market (Kuwait, Bahrain, Qatar, Saudi Arabia, UAE and Oman). Xylitol was extracted and its concentration was analysed using a special enzymatic kit. The pH of extracts was measured during 30-min incubation with Streptococcus mutans. Changes in saliva and plaque pH were noted in four subjects after the consumption of highly concentrated xylitol gums. The xylitol content in grams was clearly mentioned only on one product's label. Twelve products stated the percentage of xylitol (3.5% to 35%). The rest did not specify the amount. The mean measured weight of one piece of gum was 1.67 ± 0.38 g. The mean measured xylitol content/piece was 0.33 ± 0.21 g. Xylitol content was < 0.3 g/ piece in 9 products, 0.3-0.5 g in 7 and > 0.5 g in 5 products. None of the highly concentrated xylitol gums showed a pH drop in vitro or in vivo. One chewing gum, containing xylitol and glucose, resulted in a low pH level (< 5.5) when tested in vitro. The majority of xylitol chewing gums sold on the GCC market do not provide the consumers with the recommended daily dose of xylitol for caries prevention. Clear, accurate labeling is recommended.

Are the regional Gulf stock markets weak-form efficient as single stock markets and as a regional stock market?

The purpose of this article is to examine the efficiency of the Gulf Cooperation Council (GCC) stock markets of Saudi Arabia, the United Arab Emirates, Kuwait, Oman, Qatar, and Bahrain. We attempt to answer whether GCC stock markets are weak-form efficient individually or as a group by applying a battery of parametric, nonparametric, unit root, and Johansen cointegration tests to daily index prices denominated in local currencies covering the period December 2003 to January 2013. The findings of our study show that GCC stock markets are not individually weak-form efficient. That is to say, current prices of each GCC stock markets can be predicted from past price changes in that market. The study also finds that collectively, GCC stock markets are not weak-form efficient, as the movements of past prices of one GCC market can be used to predict the current price movement of another GCC stock market. This inefficiency could be due to the weak degree of foreign participation and the high concentration in the banking and financial sectors. Finally, the study suggests a number of policy implications for academics, policy makers and investors, and directions for future research.

Modelling and forecasting value at risk and expected shortfall for GCC stock markets: Do long memory, structural breaks, asymmetry, and fat-tails matter?

This paper addresses the question whether dual long memory (LM), asymmetry and structural breaks in stock market returns matter when forecasting the value at risk (VaR) and expected shortfall (ES) for short and long trading positions. We answer this question for the Gulf Cooperation Council (GCC) stock markets. Empirically, we test the occurrence of structural breaks in the GCC return data using the Inclan and Tiao (1994)’s algorithm and we check the relevance of LM using Shimotsu (2006) procedure before estimating the ARFIMA-FIGARCH and ARFIMA-FIAPARCH models with different innovations’ distributions and computing VaR and ES. Our results show that all the GCC market's volatilities exhibit significant structural breaks matching mainly with the 2008–2009 global financial crises and the Arab spring. Also, they are governed by LM process either in the mean or in the conditional variance which cannot be due to the occurrence of structural breaks. Furthermore, the forecasting ability analysis shows that the FIAPARCH model under skewed Student-t distribution turn out to improve substantially the VaR and the ES forecasts.

English

In recent years, the Arab Gulf Countries in particular Gulf Cooperation Council (GCC) has been an attractive market destination for the Asian businesses. China, India, Japan and other Asian countries have huge interest in developing close relationships with the six nations. As an emerging economy in the West EasternAsia, the GCC offer huge interest in doing businesses and become a gate for the Middle Eastern markets. Malaysia, besides the religious affinity that it shares with the Arab Gulf Countries, is also highly interested in expanding its trade relations with the Arab Gulf Economies. Therefore, in this article, an investigation on the countries’ trade compositions and followed by a study on Exports competitiveness were conducted. Finding from the analysis of exports competitiveness of Malaysian products will then be compared to the major Asian exporters in the GCC market. By doing this, it will identify Malaysia’s niche product that could potentially expanded in this market. This will shed a light on the Malaysia’s willingness to enhance market penetration to this economic bloc. Key words: Malaysia, Gulf Cooperation Council (GCC) countries, international trade, economic relations.

Dynamic Relationships among GCC Stock Markets and Nymex Oil Futures

Daily relationships among stock markets of the Gulf Cooperation Council (GCC) members, excluding Qatar, form two equilibrium relationships with varying predictive power. The Saudi market leads, followed by Bahrain and United Arab Emirates. Kuwait, which is dominated by momentum traders, and Oman have the weakest links with the other GCC markets. Only the Saudi index can predict—and be predicted by—New York Mercantile Exchange oil futures prices. Therefore these markets are candidates for diversified regional portfolios at the country level. The trading day effect is weak for all GCC markets and oil futures prices but remains consistent with findings for the U.S. stock market. (JEL C22, F3, Q49)