Risk and return in domestic and foreign stock trading: the GCC perspective

The objective of this research is to measure the risk and return in domestic and foreign stock trading from the perspective of GCC countries: Kuwait, Saudi Arabia, Bahrain, Oman, Qatar and United Arab Emirates. All of these countries peg their currencies to the U.S. dollar except Kuwait, which pegs to a basket of currencies. The foreign markets considered are those of the U.S., U.K, and Japan. The study addresses two key research questions: (i) do foreign stock markets provide better investment opportunities than domestic markets, given that foreign investment involves exposure to foreign exchange risk?; and (ii) does international diversification provide better risk-return trade off than purely domestic portfolios. Three forecasting models are used for domestic stock prices, foreign stock prices and exchange rates. The findings revealed that a trading rule based on the basic trading formula is more profitable in the domestic stock markets than in foreign markets (US, UK, and Japan stock markets). However, this result cannot be generalised top any market and any time period. The research also reveals that the advantages to be gained from international diversification are restricted, but the costs and problems must still be considered