Integration of Arab capital markets in light of the 2006 market corrections. (c2007)

Abstract

Arab capital markets have gained momentum since the tum of the century ignited by high oil prices and excess liquidity. In 2006, however, market corrections took place and financial contagion was observed in different Arab countries. The objective of this study is to explore if the capital markets of MEN A in general and the Gee countries in particular are integrated inter-regionally and intra-regionally with world developed capital markets. Using daily market price indices over the period 2000-2006 and the Johansen co-integration methodology, the findings reveal that Gee capital markets have a low degree of integration, and that MENA markets as a whole show a moderate level of integration. At the global level, MENA and Gee capital markets are segregated from developed markets, presenting opportunities for risk diversification to international investors. In order to pave the way for the Gee currency integration in 2010, it is recommended that Arab countries liberalize capital markets and set-up a common regulatory framework for harmonizing investing rules, listing requirements, and clearing systems across markets.