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Inferences drawn from tests of market efficiency are rendered imprecise in the presence of infrequent trading. As the observed index in thinly traded markets may not represent the true underlying index value, there is a systematic bias toward rejecting the efficient market hypothesis. For the three emerging Gulf markets examined in this paper, correction for infrequent trading significantly alters the results of market efficiency and random walk tests. The BeveridgeNelson (1981) decomposition of index returns is done to estimate the underlying index.

On April 26, 1982, Moody's Investors Service refined its rating system for the first time in its seventy-three year rating history. We examine the information content of the rating refinement in the study. We find a statistically significant change in the yields on bonds whose ratings were downgraded. The detection of the impact of refinement on bond prices implies that rating agencies perform an important function in financial markets, that is they provide information to investors. Copyright Blackwell Publishers Ltd 1999.

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Refers to previous research on the advantages of international portfolio diversification, gives an overview of the stock markets in Bahrein, Kuwait and Saudi Arabia; and assesses their sutiability for the purpose, especially as a hedge against oil price risk. Compares their 1993‐1998 monthly index returns and standard deviations with the USA, shows low or negative correlations between them and illustrates the potential this offers for risk reduction. Uses the Markowitz mean‐variance paradigm to estimate the effecient frontiers. Finds the results consistent with evidence from other emerging markets and points out that the stability of Gulf exchange rates against the US dollar also removes currency risk.