Arbitrage across the financial markets of the Gulf States and the prospects of currency union

Abstract

As has been learned from the 2007-2008 Euro-area crisis the effect on certain economies considered to be quite strong and has been significant following the spill over between financial markets across those economies, which until the crisis, were seen to have a highly successful currency union. Much has been learned of the inter-relations between economies and their financial markets in response to the 2008 banking crisis. There was a failure of regulation, but this was at an international and a government level. No single country was able to counter the problem. This is why it is important to investigate the linkages between markets in the Gulf and the extent to which they work effectively to decide whether a currency union is appropriate for these economies. This leads to the building blocks of a successful union and relates to the efficient running of product and financial markets. The current thesis investigated whether the Gulf States are ready for a currency union and what needs to be done before this can occur. In particular, the primary proposition in international finance is that arbitrage can eliminate inefficiency in pricing across borders. This is investigated in terms of the United States (US) dollar ($) and the responsiveness of prices across the Gulf, the extent to which there may already be a common market for goods. This was investigated by looking at whether a common factor is driving pricing. The next section dealt with the efficiency of the money markets in relation to the United Arab Emirates (UAE) to determine whether interest rate pass through is effective and yields reflect an efficient market for debt. Finally, the financial markets were considered; first to determine whether any of the exchanges behave in an anomalous way, and then the extent to which these markets are integrated.