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Patterns of volatility transmissions within regime switching across GCC and global markets

Author

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  • Khalifa, Ahmed A.A.
  • Hammoudeh, Shawkat
  • Otranto, Edoardo

Abstract

Unlike previous studies, this paper examines volatility transmission patterns for pairs of six stock markets of countries of the Gulf Cooperation Council (GCC) and pairs of these markets with the three global markets (S&P 500 index, Oil-WTI prices and MSCI-world), using the Multi-Chain Markov Switching (MCMS) model. This approach allows for a distinction between well diverse transmission patterns including volatility spillover, interdependence, independence and co-movements, given changes from high to low volatility regimes and vice versa. The results find evidence of different transmission patterns between the GCC and the global markets, with stronger connections with the global equity than with the oil markets. These patterns are also highly sensitive to the regimes of the selected markets which are characterized by turbulence or tranquility. For the first global market (Oil-WTI), the results show evidence of strong interdependence between Oil and each of the Kuwait and Abu Dhabi markets. Additionally, there is spillover from Oil-WTI to Dubai whose economy depends on oil, real estate and tourism. Surprisingly, we find evidence of independence between Oil and each of the Saudi Arabia, Qatar and Oman markets. For the second global market (the U.S. S&P 500 index), the results support strong interdependence with Saudi Arabia, Dubai and Abu Dhabi. There is also spillover from the S&P 500 index to Kuwait and Oman. More interestingly, we find spillover from Qatar to the S&P 500 index. For the third global market (MSCI-World), there is interdependence between MSCI and Dubai. We also find evidence of spillover from the MSCI-world to Kuwait and Saudi Arabia. Finally, we provide results in terms of inference on the regimes of high and low volatility, allowing for the interpretation of the financial shocks and the dates in which they are transmitted from one market to another. Policy implications are also provided.

Suggested Citation

  • Khalifa, Ahmed A.A. & Hammoudeh, Shawkat & Otranto, Edoardo, 2014. "Patterns of volatility transmissions within regime switching across GCC and global markets," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 512-524.
    • Handle: RePEc:eee:reveco:v:29:y:2014:i:c:p:512-524
    DOI: 10.1016/j.iref.2013.08.002
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    More about this item

    Keywords

    GCC markets; Global Markets; Multi-chain MS model; Transmissions;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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