International Portfolio Inflows to GCC Markets: Are There Any General Patterns?

Abstract

In this paper, we document the main factors underlying the foreign portfolio inflows to Gulf Corporation Council countries (hereafter GCC) by employing a recently published database of cross-country portfolio holdings by the International Monetary Fund. We find that bilateral factors such as trade volume and debt to GDP ratio between the source and GCC (host) countries play a truly significant role in determining the volume of cross border portfolio inflows to GCC markets. Particularly, there is a strong correlation between trade volume and the volume of portfolio inflows. This connection becomes even stronger over time. Moreover, GCC members' stable fiscal position (lower debt to GDP ratio) is practically one of the important determinants of the volume of portfolio inflows to GCC markets. Specifically, for the international bond holders, the foremost motivation for investing cross borders is the absence of default risk and the higher return in comparison to other countries. We have also found that the extent of openness in capital account transactions and the income level of source country are additional factors that help to explain the volume of foreign portfolio inflows to GCC members. Last but not least, although there is a remarkable increase in the volume of the international portfolio inflows to GCC countries, there also exists a "GCC bias", a huge share of the portfolio inflows to GCC markets is coming from the GCC countries. This bias is the notable consequence of the high level financial and economic integration that characterizes the GCC countries as they are heading towards a monetary union. A similar bias occurs in European Union markets as well.JEL classification: E44, F15, F36, F41

Essays on Regional Economic Integration in East Asia

“…In addition, despite the difference in the country sample, the empirical results in column 2 and 4 are also in line with the works of Lane and Milesi-Ferretti (2005) and Balli et al (2009), reinforcing this study's finding that bilateral trade has, indeed, played an important role in encouraging cross-border portfolio investments in the APT markets.…”

“…This appears to suggest that during the 2000s the relaxation of the financial market restrictions in the region has actually played an insignificant role in encouraging foreign portfolio investments. In addition, the finding also contradicts the evidence of Balli et al (2009), who found that the relaxation of capital controls in host country (proxied by the Chinn-Ito index) indeed enhanced foreign portfolio holdings in the GCC markets.…”

Gravity in International Finance

“…Some recent papers that have estimated empirical gravity equations for equity, bond and bank holdings include Ahearne et al (2004), Aviat and Coeurdacier (2007), Balli (2008), Balli et al (2008), Balta and Delgado (2008), Berkel (2007), Bertaut and Kole (2004), Buch (2000Buch ( , 2002, Chan et al (2005) Gelos and Wei (2005), Ghosh and Wolf (2000), Hahm and Shin (2009), Jeanneau and Micu (2002), Kim et al (2007), Kim et al (2006), Lane and Milesi-Ferretti (2005a,b), Lane (2005), Lee (2008), Martin and Rey (2004), Pendle (2007), Portes and Rey (2005), Portes et al (2001), Rose and Spiegel (2004), Veronique and Benassy-Quere (2006), Vlachos (2004) and Yu (2009).…”

Dependence patterns across Gulf Arab stock markets: A copula approach

“…documented by Balli et al (2009). Increased financial and economic integration as well as the changes in the geo-political and geo-economic environments in the aftermath of the 9/11 attacks are the likely reasons for the higher intra-regional private capital flows among the GCC countries.…”