This study tests for financial contagion impact of the US Subprime crisis on Gulf economies both theoretically and empirically.
Theoretically, it investigates the possible connections that could move the Subprime crisis to the Gulf market, by identifying the bridge of channels between the US and GCC countries.
Fundamental channels: the securitization, oil channel and some other commons shocks like the Fed interest rate and the US dollar.
Psychological channels: the herding behavior due to the shift in investor sentiment which is manifested by the massive liquidation and capital outflows.
Empirically, Gaussian Copula has been used to analyze the change in dependence structure from the pre-crisis to the crisis period. Results show significant level of contagion in Kuwait, Dubai stock markets and Saudi market which displays the strongest level.
Contagion signs should be taken into consideration by the portfolio managers (ineffectiveness of the diversification strategies)
Our results can be handy for Gulf central banks who decide for the bailout.
Some limits:
Theoretically: Lack of transparency and sophistication in gulf markets
Empirically: one Gaussian copula out of many was adopted basing on graphical insight.
