On the interdependence structure of market sector indices: the case of Qatar Exchange

• Published in: Review of accounting & finance 2012-01, Vol.11 (4), p.468-488
• Main Author: Ahmed, Walid M.A
• Format: Article
• Language: English
• Subjects: Banking industry; Decomposition; Diversification; Economic models; Economic theory; Institutional investments; International finance; Investment policy; Investors; Portfolio management; Securities markets; Stock exchanges; Stock prices; Studies; Technological change; Volatility
• ISSN: 1475-7702; 1758-7700
• DOI: 10.1108/14757701211279204

Purpose - The purpose of this paper is to investigate the interrelationships amongst the sector-specific indices of the Qatar Exchange (QE) (i.e. Banking and Financial Institutions (BFI), Industrial (IND), Insurance (INS), and Services (SER)). More specifically, three key issues are explored in this study. First, the long-run relationships amongst the sectors. Second, the short-run causal relationships amongst them; and third, the relative degree of endogeneity exogeneity of each sector.Design methodology approach - To address the issues of interest, the author employs the econometric analyses of Johansen's multivariate cointegration, Granger's causality, and generalized forecast error variance decomposition. This battery of techniques gives the opportunity to examine the nature of both long- and short-run intersectoral relationships in the QE. To augment the robustness of the empirical analysis, daily as well as weekly closing stock price indices for the four sectors of the Qatar Exchange are used, spanning the period from January 2, 2008 up to April 7, 2011.Findings - Based on daily and weekly data, the results of Johansen's multivariate cointegration analysis suggest that the four sector indices of the QE share a long-term equilibrium relationship. The Granger's causality analysis based on daily and weekly datasets provides clear evidence that the BFI sector seems to be a significant causal factor in regard to the price predictability of the remaining sectors in the short run, and that the SER sector surprisingly seems to have the least influential role. Finally, the results of the generalized forecast error variance decomposition analysis using daily data show that the IND and BFI appear to be the most exogenous sectors, whereas the SER and INS are the most endogenous ones. The results based on weekly data confirm the relative exogeneity of the BFI sector and the relative endogeneity of the SER sector.Practical implications - The findings of this study hold practical implications for individual and institutional investors alike. The potential gains derived from cross-sector diversification could be rather limited, given the significant degree of interrelationships found amongst the sector indices of the QE. Moreover, the composition of domestic portfolios based on sector-level investments should be revisited, particularly after major events. The findings also bring some important insights for policymakers. Given the influential role played by the BFI s