Regional and Global Spillovers and Diversification Opportunities in the GCC-Wide Equity Sectors Across Market Regimes
45 Pages Posted: 28 May 2014
Date Written: March 1, 2014
This paper examines the international diversification benefits of nine bloc-wide equity sectors/subsectors in the oil-rich Gulf Cooperation Council (GCC) countries by comparing alternative spillover models that encompass local, regional and global factors. Both the return and volatility spillover effects are found to display time variations with regime-specific patterns based on low, high and extreme market volatility states. Some GCC-wide equity sectors/subsectors are found to display segmentation from global markets during periods of high and extreme market volatility, and thus can serve as safe havens for international investors during such periods. The in- and out-of-sample portfolio analyses further suggest that supplementing global portfolios with positions in the GCC markets yield significant international diversification benefits, consistently offering much improved risk-adjusted returns across the alternative spillover models.
Keywords: GCC-wide equity sectors, Multivariate regime-switching, Time-varying correlations, Financial integration, International portfolio diversification
JEL Classification: C32, G11, G15
Suggested Citation: Suggested Citation