Essays on GCC financial markets and monetary policies

Abstract

This dissertation explores economic integration in the context of the Gulf Cooperation Council countries (GCC), which planned to form a monetary union, by assessing three different but related empirical research questions regarding GCC financial markets and monetary policies. Chapter 2 presents the first essay, which empirically investigates the pairwise linkages and volatility spillovers between GCC stock markets. In particular, the goal of Chapter 2 is to investigate the extent to which past volatility is transmitted from one GCC stock market to another GCC market at the aggregate level (e.g., the general stock markets' price indices), and to determine whether a past volatility in one GCC market affects the current volatility in another GCC market. Furthermore, Chapter 2 attempts to extend the investigation of the volatility spillover at a more disaggregated level by capturing the intra-sectoral linkages and volatility spillover effects among equivalent sectors across the GCC stock markets, namely the banking, industrial and insurance sectors. Empirically, Chapter 2 exploits the causality-in variance test pioneered by Cheung and Ng (1996) and developed by Hong (2001), who introduced a class of asymptotic N(0,1) tests for volatility spillover between two time series that exhibit conditional heteroskedasticity and may have infinite unconditional variances. The second essay, Chapter 3, aims to examine the effect of the recent global economic and financial crisis originating in U.S. stock markets on the stock markets of the GCC countries and to determine whether the sharp falls in these markets were due to the existence of the phenomenon \contagion" or whether they just reflect the continuation of the strong economic and financial linkages between the GCC economies and the U.S. economy, which exist in all states of the world during good and bad times. In particular, Chapter 3 investigates whether contagion exists from the U.S. stock market to the stock markets of the GCC by comparing two sub periods before (stable) and after (turmoil) the collapse of Lehman Brothers, which is the largest bank to fill for bankruptcy in U.S. history and has been widely used by many economists as a benchmark for the U.S. economic and financial crisis (see Bekaert et al. (2012) and Mishkin (2010)). Empirically, Chapter 3 investigates the existence of contagion using the cross-market correlations tests pioneered by King and Wadhwani (1990) and developed by Forbes and Rigobon (2002), who criticized previous studies for their use of unadjusted correlation coeffcients to investigate the presence of contagion across stock markets due to the heteroskedasticity resulting from the bias in stock market returns of the crisis country.Hence, Forbes and Rigobon (2002) introduced the adjusted cross-market correlation coefficient, which does not depend on the volatility (variance) of the crisis country, especially during the turmoil period. The last essay is presented in Chapter 4, in which I investigate the implications of fixing exchange rate on monetary policy in the context of the GCC countries whose exchange rate regimes have been fixed to the U.S. dollar for a long time. In particular, Chapter 4 aims to assess the sensitivity of the GCC countries' interest rates to the U.S. rate, since the theory of interest parity suggests that fixing GCC exchange rates to the U.S. dollar should force GCC domestic interest rates to equal the U.S. interest rate. In addition, Chapter 4 interestingly attempts to assess the stability of this sensitivity across time and to investigate whether there exists a pronounced decoupling for some GCC countries over some sub-periods. Furthermore, the fact that some of the countries' exchange rates have pegged to the U.S. dollar over specific sub-periods, then moved away from the peg over some other sub-periods (e.g., Kuwait) also gives us a rich setting through which to investigate the implications of fixing the exchange rate on monetary policy and to determine whether a country's interest rate has a stronger association with a base country's rate under a pegged period than under a non-pegged period. Empirically, this is done by testing the Uncovered Interest Parity (UIP) of each individual GCC country's interest rate, using the U.S.'s interest rate as the base country. Chapter 4 considers the time series properties of the data and uses unit root and co-integration tests. For each GCC country, it also utilizes a level regression for each interest rate episode throughout the entire sample under investigation; uses the Quandt (1960) Likelihood Ratio statistic (QLR) to determine the timing of any potential structural break during which the country's interest rate sensitivity to the U.S. interest rate changes; and applies the Error Correction Model (ECM) to capture long-run dynamic behaviours between the GCC and U.S. interest rates.

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ORCID for Jean-Yves Pitarakis: orcid.org/0000-0002-6305-7421

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