RISK AND RETURN IN DOMESTIC AND FOREIGN STOCK TRADING: THE GCC PERSPECTIVE A thesis submitted in fulfilment of the requirements for the degree of Doctor of Philosophy Jassim M. Aladwani BSc Computer Sciences, Bahrain University, Kingdom of Bahrain MBA Finance, AMA International University, Kingdom of Bahrain School of Economics Finance and Marketing College of Business RMIT University June 2016 Declaration I certify that except where due acknowledgement has been made, the work is that of the author alone; the work has not been submitted previously, in whole or in part, to qualify for any other academic award; the content of the thesis is the result of work which has been carried out since the official commencement date of the approved research program; any editorial work, paid or unpaid, carried out by a third party is acknowledged; and, ethics procedures and guidelines have been followed. Jassim M. Aladwani June 2016 ii Contents List of Tables ..................................................................................................................... iii List of Figures .................................................................................................................. xiii List of Abbreviations ....................................................................................................... xxi Summary ........................................................................................................................ xxiv Statement of Authorship ................................................................................................ xxvi Acknowledgments......................................................................................................... xxvii Chapter 1: Introduction and Background ............................................................................ 1 1.1 Introduction ............................................................................................................... 1 1.2 International Diversification ..................................................................................... 2 1.3 Relation between Stock Price and Macroeconomic Variables .................................. 5 1.4 Forecasting Accuracy and the Meese–Rogoff Puzzle ............................................... 7 1.5 Data Description ........................................................................................................ 8 1.6 Outline of the Study .................................................................................................. 9 Chapter 2: Background Information on GCC Economies and Stock Markets ................. 13 2.1 GCC Economic Overview ....................................................................................... 13 2.2 GCC Macroeconomic Overview ............................................................................. 16 2.2.1 GDP Growth ..................................................................................................... 16 2.2.2 Inflation ............................................................................................................ 19 2.2.3 Fiscal Position................................................................................................... 20 2.2.4 Exchange Rates ................................................................................................. 20 2.2.5 External Accounts ............................................................................................. 21 2.3 Kuwait Stock Exchange Overview ......................................................................... 22 2.3.1 History .............................................................................................................. 22 2.3.2 Organisation Structure ...................................................................................... 24 2.3.3 Trading System ................................................................................................. 24 iii 2.3.3.1 Properties of the new trading system (X-Stream).................................................. 24 2.3.3.2 Trading Fees .......................................................................................................... 25 2.3.3.3 Kuwait 15 Index Structure ..................................................................................... 26 2.3.4 Trading Mechanisms ........................................................................................ 27 2.3.5 Market Structure ............................................................................................... 26 2.3.6 Kuwait 15 Index and Market Capitalisation ..................................................... 28 2.4 Saudi Stock Exchange Overview ............................................................................ 29 2.4.1 History .............................................................................................................. 29 2.4.2 Organisation Structure ...................................................................................... 30 2.4.3 Trading System ................................................................................................. 30 2.4.4 Trading Mechanisms ........................................................................................ 31 2.4.5 Conditions and Order Types ............................................................................. 32 2.4.6 Market Structure ............................................................................................... 33 2.4.7 Index and Capitalisation History ...................................................................... 34 2.5 Bahrain Bourse Overview ....................................................................................... 35 2.5.1 History .............................................................................................................. 35 2.5.2 Organisation Structure ...................................................................................... 37 2.5.3 Trading System ................................................................................................. 37 2.5.4 Trading Mechanisms ........................................................................................ 38 2.5.5 Market Structure ............................................................................................... 39 2.5.6 Index and Capitalisation History ...................................................................... 40 2.6 Muscat Securities Market Overview ....................................................................... 41 2.6.1 History .............................................................................................................. 41 2.6.2 Organisation Structure ...................................................................................... 43 2.6.3 Trading System ................................................................................................. 44 2.6.4 Trading Mechanisms ........................................................................................ 45 2.6.5 Market Structure ............................................................................................... 45 iv 2.6.6 Index and Market Capitalisation....................................................................... 46 2.7 Qatar Stock Exchange Overview ............................................................................ 47 2.7.1 History .............................................................................................................. 47 2.7.2 Organisation Structure ...................................................................................... 49 2.7.3 Trading System ................................................................................................. 49 2.7.4 Trading Mechanisms ........................................................................................ 50 2.7.5 Market Structure ............................................................................................... 51 2.7.6 Index and Market Capitalisation....................................................................... 52 2.8 UAE Stock Price Overview..................................................................................... 53 2.8.1 History .............................................................................................................. 53 2.8.2 Organisation Structure ...................................................................................... 54 2.8.3 Trading System ................................................................................................. 55 2.8.4 Trading Mechanisms ........................................................................................ 56 2.8.5 Market Structure ............................................................................................... 57 2.8.6 Index and Market Capitalisation....................................................................... 58 2.9 Conclusion ............................................................................................................... 59 Chapter 3: Relationship between Exchange Rates and Stock Prices ................................ 61 3.1 Introduction ............................................................................................................. 61 3.2 Literature Review .................................................................................................... 62 3.3 Methodology ........................................................................................................... 64 3.3.1