Dependence patterns across Gulf Arab stock markets: A copula approach

• We use copulas to model the dependence structure across Gulf Arab stock markets.
• The marginal models indicate strong volatility persistence in all seven equity markets.
• The copula models imply asymmetric tail dependence of the bivariate equity returns.
• Abu Dhabi and Dubai markets appear as the primary source of asymmetric dependence.

Underpinned by rising hydrocarbon revenues, the stock markets of the six GCC (Gulf Cooperation Council) countries have demonstrated significant integration over the past decade. This paper studies the dependence patterns of the bivariate distribution of returns across seven GCC stock markets over the period 2004–2013 using copula models. The results of the marginal models indicate strong volatility persistence in all the seven equity markets. The results from the copula models indicate that the conditional dependence across all 21 pairs of equity markets’ returns is not strictly symmetric in that the lower tail dependence is significantly greater than the upper tail dependence. The stock markets of Abu Dhabi and Dubai appear as the primary source of asymmetric dependence across the different equity market pairs.