تحقیقات تجربی از کارآیی اطلاعاتی بازارهای سهام در شورای همکاری خلیج فارس: شواهدی از شبیه سازی بوت استرپ

The aim of this study is to explore whether the Gulf Cooperation Council (GCC) equity markets are informationally efficient with regard to oil and gold price shocks during the period 2006–2008 using daily dollar-based stock market indexes dataset. This paper extends research literature related to the assessment of market efficiency in emerging markets by providing a robust bootstrap simulation technique for the entire GCC financial markets. Unlike most empirical studies in this field, this study represents the first known attempt in empirically examining the impact of oil and gold prices on the financial performance of the six distinctive GCC stock markets. Tests for non-normality and ARCH effects show that the selected variables are not normally distributed and the volatility is time varying. This implies that the standard econometric methods are not reliable to carry out a trustworthy testing of market efficiency. To this end, we use a new method and testing technique which is robust to both non-normality and ARCH effects. The empirical findings reveal that the GCC equity markets are informationally efficient with regard to gold and oil price indexes. Our results entail that short-term arbitrage profit opportunities in the equity markets of these countries might not prevail. Moreover, our findings can reconcile previously contradictory results regarding the weak and semi-strong forms of efficiency of the GCC stock markets and its relation vis-à-vis petrol and gold prices. These findings have important policy implications and should be of interest to market participants, researchers, regulators and policymakers. The results of this paper also provide an incentive for further research in the areas of emerging market efficiency, strategic asset allocation, and portfolio risk management.

The Gulf Cooperation Council (GCC) region1 is one of the fast growing areas in the global economy and its stock markets represent very promising emerging markets. Nonetheless, the GCC financial markets differ from those of developed countries and from other emerging markets in the sense that they are in principal segmented from the world equity markets and are excessively sensitive to regional political events. Certainly, during the 1990s, the attempts of each individual country to diversify their economies, privatize their public sectors, employ advances in trading technology and improve the legal and financial institutional infrastructures lead to the real developments of these markets. As a result, the GCC markets have managed to tempt institutional investors and foreign individuals to convey some holding investments to their markets. The financial markets in the Gulf region are mainly dominated by commercial banks and real-estate enterprises. Generally speaking, companies that are publicly listed in the GCC stock exchanges comprise those in banking and investment, insurance, industrial, service, and other market sectors. The number of publicly traded companies per market is rather small, and they are controlled by a small percentage of the indigenous population. Moreover, the six GCC equity markets are relatively small in terms of market capitalization, number of listed companies and are usually characterized by infrequent trading of securities and with lower trading volume once compared with other well-established emerging markets. Furthermore, until recently, entry to the Gulf equity markets was permissible to its nationals only and with a limited access to nationals from other GCC states. The recent economic developments and exceptional growth rates besides capital requirements to fund budget deficits has convinced the six GCC states to instigate capital market liberalization and broad-ranging structural reforms and regulations, allowing foreign investors, and particularly institutional investors, greater access to their equity financial markets. As such, emerging equity markets in this region have been the focus of much attention recently from international investors as a result of major changes in the economic and financial environment in the GCC region. In spite of the increasing importance of the GCC financial markets, there is very few published research in this respect and particularly within the context of a comprehensive testing of the six GCC stock markets efficiencies. The literature on the efficiency of the GCC equity markets has been relatively meager, inconclusive and providing mixed results. As such, and in contrast to all existing published literatures pertaining to the testing of emerging markets' efficiency, this article intents to make the following contributions to the academic literature: Firstly, it represents one of the few research papers that tackle the efficient market hypothesis in the GCC stock markets and by using coherent dollar-based equity indexes, for all six GCC markets, besides oil and gold prices. In fact, the latter has an important effect in isolating the impact of foreign exchange movements on the relative performance of stock markets' indexes. Furthermore, the stock market indexes in addition to the two benchmark indexes (of oil and gold) selected for this study provide a realistic alternative portfolio, as well as new data, for studying existing techniques of GCC market efficiency estimation. To this end, a database of the six GCC states equity indexes is utilized whose behavior is presumably more diverse than if equity assets of any particular stock market had been employed. The basic argument is that specific country indexes may have, compared to individual stocks, a more predictable structure due to aggregation. Secondly, unlike most empirical studies in this field, this study represents the first known attempt in empirically examining the impact of oil and gold prices on the financial performance of the six distinctive GCC stock markets. To date, all known empirical studies examining the efficiency in GCC markets have been conducted mainly in the framework of a single-country testing of efficiency and without isolating the effects of foreign exchange risk. Finally, the implemented testing methods and techniques represent robust and accurate tools to assess empirically whether the efficient market hypothesis (EMH) is verified or not. The result of this study also provides an incentive for further research in the area of emerging market efficiency, strategic asset allocation, and portfolio risk management. Nonetheless, despite its strategic importance and the unprecedented economic and social transformation in the GCC region it is one of the neglected research areas, especially in the context of finance and financial markets analysis. The aim of the current study is to empirically investigate whether the equity markets in the six GCC countries are informationally efficient with regard to oil and gold prices. This empirical investigation is conducted by applying a new bootstrap test for causality with leverage adjustments developed by Hacker and Hatemi-J (2006), which is robust to non-normality and time-varying volatility that usually characterize financial data. Applying this method is a necessary precondition for making valid inference. This is the case because standard methods are based on the assumption of normal distribution with constant volatility. However, the probability of extreme events in financial markets is usually much higher than what the normal distribution would suggest. This is especially the case in the emerging financial markets. Furthermore, the volatility in financial markets is often time varying. In such situations the standard methods do not perform accurately according to the simulation experiments conducted by Hacker and Hatemi-j (2006). To remedy this problem the authors have developed a leveraged bootstrap test method that we apply in this paper. This computer intensive test method is based on the empirical distribution of the data set that does not necessarily have to be normally distributed. In addition, this method takes into account the effect of time-varying volatility by implementing leverage adjustments. Thus, our empirical results are expected to be more precise compared to previous literature that applies standard methods. Efficient market hypothesis and random walk modeling have been at the focal point of debate in financial literatures for several decades. As such, the implications of market efficiency for speculators, institutional investors, asset managers, global financial markets, and policymakers are without doubt overwhelming and justify the interest they have generated from both academics and practitioners alike. The long unrecognized contribution of Bachelier (1900) is considered as the origin of the theory behind efficient markets. However, the efficient market literature was established only in the mid-1960s via the seminal work of Fama, 1965, Samuelson, 1965 and Mandelbrot, 1966. Since the well-known review provided by Fama (1970), the efficient market hypothesis (EMH) has been one of the most widely researched areas in finance. Furthermore, Fama (1998) contends that most return anomalies in major stock markets are chance results that tend to disappear in the long term with a reasonable change in methodology, thus sustaining the view that mature capital markets are generally efficient in terms of information. A survey of efficient market studies by Fama (1970) provides overwhelming evidence to support an efficient market hypothesis for U.S. stock markets. In recent years, however, numerous departures from market efficiency in the form of anomalies have attracted attention of academics and practitioners alike. Evidence against the random walk hypothesis (RWH) for stock returns in the developed capital markets are reported by Fama & French, 1988 and Lo & MacKinlay, 1988, among others. Nevertheless, Lo, 1997 and Hatemi-J, 2002 argue that there is still no clear consensus as to whether markets, and particularly financial markets, are efficient or not and especially for the case of emerging economies. The rising interest in investment opportunities in emerging economies in addition to the increasing globalization of financial markets has heightened interest in emerging markets and has raised questions about the efficiency of their equity financial markets. There are a large number of literatures on the efficiency of emerging financial markets. Among the most relevant papers are studies on the Latin American financial markets, Asian and European continents, and the Middle East and North Africa (MENA) region. Urrutia (1995) assesses the efficiency of the financial markets of Argentina, Brazil, Chile, and Mexico. The author rejects the existence of a random walk hypothesis when using a variance ratio test. However, on the other hand, and by using a runs test, the author finds that all four markets to be weak-form efficient. In contrast, Ojah and Karemera (1999) find that Latin American equity returns follow a random walk and are generally weak-form efficient. Grieb and Reyes (1999) revisit the random walk properties of stocks traded in Brazil and Mexico using the variance ratio tests and conclude that index returns in Mexico exhibit mean reversion and a tendency toward random walk in Brazil. These conflicting inferences possibly could be attributed to the effect of cross-sectional and temporal variations in the degree of infrequent trading in these emerging markets. Also it could suggest the presence of positive serial correlation in returns. Indeed, the existence of a positive correlation does not necessarily imply that the markets are inefficient but that it could be indicative of economic growth (especially in emerging markets). Among the existing literatures, there are quite a few studies examining EMH of the Asian markets. More recently, using daily data of eight Asian stock markets, Lim and Kim (2008) empirically investigate the effects of the 1997 financial crisis on the efficiency of eight Asian stock markets by applying the rolling bicorrelation test statistics for the three sub-periods of pre-crisis, crisis, and post-crisis. Their statistical findings show that Hong Kong is the most efficient over the 14 years full sample period, followed by Korea and Taiwan, while Malaysia is at the tail end of the ranking list. However, in many cases, the 1997 Asian crisis is responsible for a large portion of inefficiency, notably in Hong Kong, the Philippines, Taiwan and Malaysia. However, most of these markets recovered in the post-crisis period in terms of improved market efficiency. On another front, Cajueiro, Gogas, and Tabak (2009) examine the impact of increasing financial market liberalization on the degree of market efficiency by using the Athens stock exchange as a case analysis. In their paper, the authors assess if financial market liberalization introduced at the beginning of the 1990s in Greece has changed the degree of market development (efficiency) by studying time-varying global Hurst exponents. Moreover, the paper presents empirical evidence of strong long-range dependence at the end of the 1980s and beginning of the 1990s for the Greek stock market, prior to financial market liberalization that occurred during that period. However, with the deepening of the liberalization process, generalized Hurst exponents converged to levels which characterize more efficient and developed markets (low evidence of predictability). The convergence of generalized Hurst exponents to random walk provides empirical evidence of the benefits of liberalizing the capital account and portfolio flows. The authors then conclude that changes in financial market liberalization have important positive implications on the degree of development of stock markets. Several studies attempt to address the random walk hypothesis and market efficiency in MENA emerging markets, with mixed results. One of the leading studies of market efficiency in the Middle East by Butler and Malaikah (1992) used serial correlation and runs tests to evaluate the weak-form efficiency of the stock markets in Saudi Arabia and Kuwait. Their results indicate significant departure from random walk for the Saudi stocks and less pronounced but significant autocorrelations for many Kuwaiti stocks similar to other thinly traded markets. El-Erian and Kumar (1995) find the Turkish and the Jordanian markets to be inefficient. In another relevant study, Buguk and Brorsen (2003), test for the random walk version of the efficient market hypothesis for the Istanbul Stock Exchange (ISE) using its composite, industrial, and financial index weekly closing prices. The results obtained from three of the tests indicate that all three series are a random walk, but a nonparametric test provides some evidence against a random walk. The authors then conclude that the ISE is neither weak-form nor strong form efficient and the difference between past studies may be attributed to both the different time spans and different statistical methods used. Al-Loughani (1995), using more robust statistical techniques on the Kuwait market index, finds further evidence and concludes that the series exhibit stationarity but not random walk. In a relatively recent study, Abraham, Seyyed and Alsakran (2002), using the Beveridge and Nelson (1981) decomposition of index returns to control and correct for infrequent trading, runs tests, and variance ratio tests, examine the random walk in three Gulf markets (Saudi Arabia, Kuwait and Bahrain) and find evidence of weak-form efficiency in the Saudi and Bahraini equity markets only. Finally, in a latest study Al-Khazali, Ding and Pyun (2007) revisit the empirical validity of the weak-form efficient market hypothesis of the equity markets in eight MENA countries: Bahrain, Egypt, Jordan, Kuwait, Morocco, Oman, Saudi Arabia and Tunisia. They compare their findings using new rank and sign tests (Wright, 2000) to other testing results reported in the literature. The authors find that the return behaviors of all eight MENA markets computed from the published index return series in their raw data form do not follow a random walk pattern. On a first glimpse, this may lead one to conclude that weak-form efficiency does not exist in these markets. However, when returns from the published indexes are corrected for the statistical biases, the RWH cannot be rejected for any of the eight markets. Indeed, their findings help to explain to a certain degree the contradictory results in the literature regarding the relative efficiency of stock markets in the MENA region. In fact, most previous studies on the efficient market hypothesis have used either univariate or bivariate models, which might suffer from an omitted variable problem. This study incorporates two sources of information important in the Gulf markets, namely oil and gold prices. Oil and gold prices are two major factors operating in the economy of each of the GCC countries because oil is the main source of income in the region and gold is one of the main investment objects. Thus, investigating the dynamic impact of these variables on the financial markets in the Gulf region is of paramount importance to domestic and foreign investors, financial institutions, regulatory authorities as well as policymakers. It is widely agreed upon that financial data can induce problems for standard tests of Granger causality. First, the standard tests of causality are not appropriate if the variables characterized by unit roots. Second, the assumption of normal distribution is usually not fulfilled in financial markets. Third, autoregressive conditional heteroscedasticity (ARCH) is also usually a feature of financial data. An improved methodology is utilized to deal with these problems. Hacker and Hatemi-J (2006) recommend that using leveraged bootstrap distributions is an appropriate strategy in the case of non-normal data with ARCH effects. A new information criterion for selecting the optimal lag order is also incorporated into the analysis. These methods are expected to provide more accurate inference compared to other methods. As a result of previous discussion and to address the above deficiencies in finance literature, this paper attempts to fill this void by focusing more specifically on testing the efficient market hypothesis in weak form as well as semi-strong form in the presence of non-stationary data with time-varying volatility. In particular, the main objectives of this study are: a) to offer a detailed overview of the efficient market hypothesis (EMH) b) to evaluate the EMH in both weak-form and semi-strong form by applying alternative methodology that is more accurate than other methods c) to assess the potential implications of the existence or non-existence of efficiency in the six GCC equity markets. The remainder of the paper proceeds as follows. The principal features of the efficient market hypothesis are reviewed in Section 2. The dataset and empirical methods are described in Section 3. Section 4 contains a discussion of the empirical findings and testing results. Section 5 summarizes relevant findings and concludes.

Even though considerable literatures have investigated the statistical and econometrics significance of efficiency models in emerging markets, this article provides real-world and up-to-date techniques that are useful for testing of emerging markets equity markets. This is with the objective of setting-up the basis of a proactive methodology for the measurement of efficiency in non-normal distributions and infrequent trading platforms. Indeed, the results of our findings reiterate the need for more integration among the six GCC stock markets. Furthermore, the used methodologies and the robust testing results have wider implications for financial markets participants, financial institutions, regulatory authorities and policymakers. This paper extends research literature related to the assessment of market efficiency in emerging markets by applying more up-to-date methodology to improve the robustness of the empirical results for all six GCC financial markets in addition to oil and gold prices. Unlike most empirical studies in this field, this study represents the first known attempt in empirically examining the impact of oil and gold prices on the financial performance of the six distinctive GCC stock markets. In fact, this article represents one of the few research papers that address the issue of efficient market hypothesis in the entire GCC region (that is, six GCC stock markets) and by using coherent dollar-based equity indexes as well as oil and gold prices. In actual fact, earlier studies on the efficient market hypothesis have used either univariate or bivariate models, which might suffer from an omitted variable problem. This paper incorporates two sources of significant information in the Gulf markets, explicitly oil and gold prices. Accordingly, investigating the dynamic impact of these variables on the financial markets in the Gulf region is of paramount importance to domestic and foreign investors as well as policymakers. The main objective of this study is to test for the efficient market hypothesis in the six Gulf Cooperation Council (GCC) countries equity markets—namely Bahrain, Kuwait, Qatar, Oman, Saudi Arabia, and the United Arab Emirates. Share price index dataset for the period 2006:04–2008:03 is used. We test for the efficient market hypothesis in the weak form by testing for unit roots in the equity index in each market using the Ng–Perron test. This test has good size and power properties compared to standard tests. We find that the data generating process for each index is characterized by one unit root. The existence of a unit root indicates that price index changes are unpredictable and totally random. Therefore, it is not viable to make use of technical analysis in the GCC financial markets in searching for systematic patterns in the price index with the hope of arbitrage opportunities. As such, the past values of the equity indexes cannot be used in order to systematically forecast the future value of the six GCC stock market indexes. We interpret these results as empirical evidence for the efficient market hypothesis, in its weak form, in each of the six distinctive markets. Therefore, market distortions and arbitrage opportunities based on asymmetric information are ruled out and, hence, no opportunities for earning abnormal returns, in any of the six GCC equity markets can be attained systematically by deriving financial forecast at all times, however. Our findings help to explain the contradictory results in the finance literature vis-à-vis the relative weak-form efficiency of the six GCC equity markets. By and large, our findings contradict almost all previous results on the weak-form efficiency of GCC equity markets. Given the improved power and precise critical values of the Ng and Perron (2001) test, our new findings suggest that the empirical examination of the weak-form efficient market hypothesis of the six GCC equity markets reported in the literature should be revisited. Additionally, we also test for the efficient market hypothesis in the semi-strong form by conducting causality tests. Since the data is non-normal with time-varying volatility we make use of an alternative methodology based on the leverage bootstrapped simulation technique, which is robust to both of these problems. Overall, the results appear to be robust, and our causality test results reveal that neither the oil price index nor the gold price index causes the equity price indexes of the six GCC markets. This means that the information contained in the gold and oil price indexes cannot improve the forecast of the equity market index in each of the six GCC states. Thus, the possibility of short-term arbitrage is ruled out and the six GCC equity markets can be considered as informationally efficient with respect to oil and gold prices. This has important implications for domestic and foreign institutional investors and portfolio managers operating in the Gulf region since the above finding can aid in the structuring of coherent trading portfolios. This can be achieved by developing rational asset allocation strategies between the six GCC equity markets and by utilizing oil and gold as a defensive hedging strategy in case of equity markets' turmoil. Indeed, our findings are genuine in nature and cannot be compared against previous studies pertaining to examining the impact of oil and gold prices on the six GCC equity markets. This is due to the fact that this attempt is the first known endeavor in the finance literature to examine the impact of oil and gold prices on the semi-strong-form efficiency of the GCC markets. Moreover, testing results presented in this paper have practical implications when assessing the efficiency of thinly traded markets, where explicit inclusion of more powerful methodologies could serve to produce more robust and reliable testing results to explain previously obtained contradictory results. The policy implication of this inquiry are that the six GCC equity markets, as relatively new emerging markets, should consider taking into account the following four additional measures and market opportunities to improve the operational aspects of their respective markets: 1. Our empirical testing suggests important implication for fund managers and institutional investors currently operating in the GCC region and also for those investors who are in the process of diversifying their asset's holding by allocating foreign capital to the GCC zone. For instance, an effective active trading strategy can be attained by working out rational asset allocation strategies between the six GCC equity markets and thereafter by utilizing oil and gold (cash or future contracts) as a defensive hedging strategy against equity trading exposures. The latter can be an effective hedging strategy and handy tool in case of equity markets' meltdowns. These issues are important for cross-border investors and multinational firms and can aid foreign investors in strategic and tactical asset allocation and eventually in managing risk more effectively. 2. Our empirical findings have practical implications and relevancy for both institutional investors and retailers operating in the Gulf region, in particular, and for policymakers, in general. Indeed, recent financial liberalization agendas put into practice by the six GCC states were successful in making their domestic economies grow faster along with more trading activities in their distinctive stock markets. It is in the best interest of the six states to speed-up their financial reform measures, including privatization programs and enhancing prudential regulations and policies, so as to make their six equity markets more perceptible and efficient in processing and divulging information. The ramification of these results for decision-makers is that crossing-out of restrictions and barriers to the influx of foreign capital to GCC region's equity markets is expected to improve and enhance growth and liquidity in these financial markets. This is because more liquid capital markets offer lower borrowing costs for GCC entities aspiring to raise equity funds domestically. Moreover, international financial institutions will be willing to diversify their portfolios by tapping the GCC financial markets in order to diversify across countries with a wide range of risk/return alternatives. Furthermore, increased inter-GCC liberalization and reforms will not only aid in increasing further equity market efficiency within the GCC zone, as the experience of other developed markets demonstrates, but will offer GCC investors as well a better prospect to diversify their portfolios and reducing risk accordingly. As such, the increased liberalization and reforms within the GCC region is expected to attract significant portfolios and direct investments to the region and it will assist in reducing borrowing costs for local entities and will support and simulate economic growth in the region. 3. More integration among the GCC financial markets by facilitating cross-listing of equity securities to overcome the problem of thin trading of financial assets. This tactic will also benefit both domestic and foreign investors with a wide choice of securities to invest in and ultimately in enhancing market activities in terms of liquidity. 4. A number of extra measures can be taken into account to enhance further the efficiency of the six GCC equity markets, including (and not limited to) the imposition of wide-ranging transparency and precision in corporate financial reporting, the improvement on private and corporate accountability procedures and measures, and finally embracing and enforcement of international accounting standards, legislations and coherent risk management measures. 5. To end with, the fundamentals of the GCC equity markets are seemingly positive, and expected to continue on this track, as the six GCC markets continue to offer attractive trading and investment prospects for both local and overseas investors with fairly decent risk-adjusted returns on invested capital.