Dynamic Financial Linkages Among Selected OIC Countries

Abstract

This study examines financial integration among eight stock markets of Organization of the Islamic Conference (OIC) countries. Of these stock markets, four are from Middle East and North Africa (MENA) region i.e., Turkey, Egypt, Oman and Kuwait, and the rest four are from the Asian region i.e., Malaysia, Indonesia, Bangladesh and Pakistan. The study also explores the integration between these stock markets and the three largest stock markets in the world, US, Japan and UK. By employing cointegration analysis, the evidence of the existence of integration among OIC stock markets is found only among four Asian- OIC stock markets (Malaysia, Indonesia, Bangladesh and Pakistan), while no evidence of integration is found among the MENA stock markets. However, the OIC stock markets are found to be cointegrated with the US, Japanese and UK stock markets. These findings seem to indicate that the OIC stock market are segmented regionally and integrated internationally. This implies that investors can gain long-run risk reduction through portfolio diversifying in the MENA region, but not in the Asian region and developed stock markets. Finally, variance decompositions show that the OIC stock markets in the Asian region respond more to the shocks in the Japanese stock market, while the MENA stock markets respond more to the shocks in the UK market.