Measuring financial integration in GCC stock markets: Dynamics, risk premia, and the path to enhanced cooperation

The goal of this study is to examine the extent and dynamics of regional financial integration among the Gulf Cooperation Council (GCC) countries by analysing local stock market returns through various risk premia related to both regional stock and exchange markets. Our approach employs the International Capital Asset Pricing Model (ICAPM), which incorporates the degree of financial integration when pricing market risk premia. Additionally, we introduce a regional currency basket, the Khaleeji, to establish a reference currency for the region and to prospect the twin objective: reducing the peg to the US dollar and fostering regional monetary cooperation. Our key findings reveal that GCC stock markets are influenced by both regional and local financial shocks and crises. Long-term analysis demonstrates that the regional risk premium is significant for GCC countries, with stronger cooperation potentially improving regional risk-sharing. The results further suggest that the level of regional financial integration varies across countries, reflecting a partial integration among GCC countries. The growing importance of regional risk premia and financial integration may stimulate increased financial cooperation within the GCC, ultimately leading to enhanced economic integration.