Country Risk and Stock Market Performance: An Empirical Analysis of the Gulf Cooperation Council (GCC) Countries

Country risk includes a variety of factors such as political instability, economic fluctuations, and regulatory changes that can significantly influence the investment environment and market dynamics. As a result, evaluating country risks has become an increasingly important concern for both researchers and investors. This thesis comprises three empirical chapters that investigate the impact of country risk on the performance of stock markets in the Gulf Cooperation Council (GCC) region from 2005 to 2020. The first empirical chapter explores the short- and long-term relationships between country risk and stock market performance using the dynamic panel ARDL (Autoregressive Distributed Lag) approach over the specified period. The findings indicate that country risk had a long-term effect on the stock markets in the GCC region. The second empirical chapter examines the influence of risk factors on the co-movement between each of the GCC stock markets and the US stock market from June 2005 to August 2020. The results show that the impact of country risk on stock market correlations varied throughout the study period. The third empirical chapter focuses on the long-term relationship between country risk and firm-specific financial metrics, such as earnings and dividend payout policies, using data from 24 listed companies in the Kingdom of Saudi Arabia (KSA). The analysis reveals that different components of country risk had varying effects on the sector-specific performance of firms listed on the Saudi financial market. Overall, these findings suggest that equity prices in the GCC region are significantly influenced by various components of country risk, which is consistent with the Arbitrage Pricing Theory (APT). This model provides a comprehensive framework for understanding the multitude of factors that affect stock prices. Consequently, investors and policymakers should consider the broad spectrum of country risk factors to achieve a more precise and accurate evaluation of the GCC stock markets. By doing so, they can better anticipate market movements and make more informed investment and policy decisions.