^aDepartment of Finance and Economics, Gulf University for Science and Technology, Hawally, Kuwait

Correspondence: Naser I. Abumustafa, Department of Finance and Economics, Gulf University for Science and Technology, Hawally 32093, Kuwait. E-mail: drnaser69@hotmail.com

Abstract

This study shows how risk can be decreased by diversification in emerging economies. Results for diversification and correlation tests indicate that Arab Stock Markets are an ideal place for diversification for investors of developed countries. This paper evaluates stock prices as a leading indicator of economic activity. Time-series analysis and the notion of "Granger causality" are used in this project to estimate relationships between stock prices and the economy, and to see whether they are consistent with theory. We show that the higher the causality between stock market capital and gross domestic product (GDP) in any economy, the lower the risk. Results indicate evidence of causality between stock market capital and GDP in the seven countries.