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Financial integration in the United Arab Emirates Stock Markets

Financial integration in the United Arab Emirates Stock Markets
Financial integration in the United Arab Emirates Stock Markets

This paper examines the integration of financial markets using data from the Dubai Financial Market Stock Exchange, Abu Dhabi Stock Exchange and the FTSE Nasdaq Dubai UAE 20 index. To do this, we apply a vector error correction model and a permanent-transitory decomposition of the series of prices. Our results reveal the existence of a long-run equilibrium relationship between the three financial indices suggesting that UAE stock markets are integrated. Shocks to any of these markets affect the other markets in the long and the short run through the equilibrium condition. We uncover a major role of the FTSE Nasdaq Dubai UAE 20 index in this equilibrium relationship. Our analysis of market integration also allows us to obtain a permanent-transitory decomposition given by two common factors that drive the three financial indices. Whereas the first factor is defined as a weighted combination of the two major financial indices the second factor is mainly determined by the FTSE Nasdaq Dubai. As a byproduct of our analysis, we find empirical evidence of short-run and long-run predictability running from the Dubai financial indices to the Abu Dhabi index.

Cointegration, Market integration, Permanent-transitory decomposition, UAE Stock Markets
1544-6123
Kapar, Burcu
92416c2b-880f-41a0-bf73-15042d9bf993
Olmo, Jose
706f68c8-f991-4959-8245-6657a591056e
Ghalayini, Rim
732447dc-30dd-4106-bf94-947fcef1807b
Kapar, Burcu
92416c2b-880f-41a0-bf73-15042d9bf993
Olmo, Jose
706f68c8-f991-4959-8245-6657a591056e
Ghalayini, Rim
732447dc-30dd-4106-bf94-947fcef1807b

Kapar, Burcu, Olmo, Jose and Ghalayini, Rim (2019) Financial integration in the United Arab Emirates Stock Markets. Finance Research Letters. (doi:10.1016/j.frl.2019.06.017).

Record type: Article

Abstract

This paper examines the integration of financial markets using data from the Dubai Financial Market Stock Exchange, Abu Dhabi Stock Exchange and the FTSE Nasdaq Dubai UAE 20 index. To do this, we apply a vector error correction model and a permanent-transitory decomposition of the series of prices. Our results reveal the existence of a long-run equilibrium relationship between the three financial indices suggesting that UAE stock markets are integrated. Shocks to any of these markets affect the other markets in the long and the short run through the equilibrium condition. We uncover a major role of the FTSE Nasdaq Dubai UAE 20 index in this equilibrium relationship. Our analysis of market integration also allows us to obtain a permanent-transitory decomposition given by two common factors that drive the three financial indices. Whereas the first factor is defined as a weighted combination of the two major financial indices the second factor is mainly determined by the FTSE Nasdaq Dubai. As a byproduct of our analysis, we find empirical evidence of short-run and long-run predictability running from the Dubai financial indices to the Abu Dhabi index.

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UAE_Stock_Markets revised final - Accepted Manuscript
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More information

Accepted/In Press date: 29 June 2019
e-pub ahead of print date: 2 July 2019
Keywords: Cointegration, Market integration, Permanent-transitory decomposition, UAE Stock Markets

Identifiers

Local EPrints ID: 432700
URI: https://eprints.soton.ac.uk/id/eprint/432700
ISSN: 1544-6123
PURE UUID: f6c82c27-8fc7-4f62-816f-78342e7e0da9
ORCID for Jose Olmo: ORCID iD orcid.org/0000-0002-0437-7812

Catalogue record

Date deposited: 24 Jul 2019 16:30
Last modified: 07 Aug 2019 00:33

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Contributors

Author: Burcu Kapar
Author: Jose Olmo ORCID iD
Author: Rim Ghalayini

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