The study examines empirically whether, and to what extent, equity markets in the Gulf Cooperation Council (GCC) are integrated inter-regionally. According to the official Charter of the GCC, building stronger ties among financial and capital markets of member states is a chief objective of the GCC. The results for the equity markets of Saudi Arabia, Kuwait, Bahrain and Oman suggest that these markets share a common stochastic trend that binds them together over the long-run. The results from alternative tests also indicate that measures taken since 1997 to liberalize the capital markets in the Gulf region are at least partly responsible for linking the Gulf markets. At least two implications emerge from these results. First, portfolio diversifications in the context of the Gulf region should bring little or no benefits to investors with long-term horizons, although short-term gains remain a possibility. Second, further steps to liberalize capital markets in the region appear an appropriate strategy for achieving a more integrated capital markets in the Gulf.
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