Do Financial Market Openness and Stock Market Returns Drive Economic Growth in GCC Countries? New Investigation from Panel Structural Breaks

Abstract

This paper revisits the effects of financial market openness and stock market returns on economic development in the Gulf Cooperation Council countries over the period 1993–2022. We performed the panel stationarity test advanced that accommodates the presence of multiple structural breaks and exploits the cross-section variations. Empirical results from several panel tests provide strong support for the long-run positive effect of financial market openness on economic growth and a long-run negative association between stock market returns and growth. Findings of the robustness checks reveal that the effect of both financial market openness and stock market returns on economic growth differs across countries.

1. Introduction

Since the pioneering work of McKinnon (1973) and Shaw (1973), the economic literature points to different channels through which might affect economic growth in the framework of the research of the main keys affecting economic development in the short-term (Wardley-Kershaw & Schenk-Hoppé, 2022; Brada & Iwasaki, 2024; Iwasaki, 2022; Ono & Iwasaki, 2022; Elgharib, 2024).

The two primary avenues through which the benefits of financial market openness could be transferred to economic development are through saving and investing (Lee & Chou, 2018; Hou & Cheng, 2017; Tanna et al., 2017; Galindo et al., 2007; Kroszner et al., 2007; Abiad et al., 2008). That financial market openness has a “quantitative” effect, which manifests itself in an increase in savings and investment (Naik & Padhi, 2015).

Moreover, financial market openness is strongly associated with an efficient allocation of savings while financial repression leads to the opposite effect. Financial market openness is also considered to be the origin of the emergence of many financial and banking crises as it opens financial sectors to external shocks and increases uncertainty and competition between banks and other financial institutions (Li & Si, 2024; Batuo et al., 2018; Yu et al., 2018; Ahmed, 2013; Demirguc-Kunt & Detragiache, 1998; Kaminsky & Reinhart, 1999; Ranciere et al., 2006; Ariss, 2008; Bussiere & Fratzscher, 2008).

Numerous empirical studies attempted to explain how the stock market can promote economic development considering the contradictory findings regarding the true impact of financial market openness on growth. Stock returns have been observed to be associated with economic fundamentals and macroeconomic variables. Since credit market development supports growth in industries that rely on external finance for physical capital accumulation but is irrelevant for growth in innovation-intensive industries, more developed stock markets support faster growth of high-tech, innovative industries and, as a result, lead to more growth (Brown et al., 2017).

Most of the studies on the linkage between financial development and economic output have focused on developed and developing countries (Lee & Chou, 2018; Hou & Cheng, 2017; Tanna et al., 2017; Ben Rejeb & Boughrara, 2013; Hamdi et al., 2014; Foroni et al., 2017), the Asian context (Yu et al., 2018; Wu et al., 2017; Chiang & Chen, 2016), or the African context and the MENA region (Batuo et al., 2018; Ahmed, 2013; Misati & Nyamongo, 2012; Ben Naceur et al., 2008), less abundant studies have been carried out on the GCC context (Gazdar et al., 2018; Muhammad et al., 2016; Hamdi et al., 2014; Grassa & Gazdar, 2014).

The GCC region could be an appropriate and interesting case study to revisit the finance and growth relationship for several reasons. First, during the last two decades, GCC countries have made considerable efforts to develop their financial systems. The financial market has undergone several reforms to strengthen stock market supervision and improve governance practices (IMF, 2018). In this region, stock markets play a crucial role, especially in Kuwait and Saudi Arabia (World Bank, 2015). Second, the GCC area is an oil-based region. These states depend on oil and gas extraction, which brings in government revenue, export earnings, and other economic activity. Third, the financial system of GCC nations is highly developed, having a vital role within their economic structure. It is also qualified as a dual financial system since it incorporates two different types of financial systems, namely conventional finance and Islamic finance. Hence, it is very interesting to study the consequences of these reforms on the economic output of the GCC countries.

This paper’s goal is to investigate the connection between financial market openness, stock market performance, and economic output. To this end, we used a balanced panel of six Gulf Cooperation Council countries over the period 1993–2022. As an empirical approach, we performed a multivariate analysis based on the cointegration test and Panel Error Correction Model (PECM).

This work makes numerous contributions to the body of current empirical literature. First, this paper revisits the finance–economic development relationship for GCC countries applying the panel stationarity test advanced by Lluís Carrion-i-Silvestre et al. (2005) that accommodates the presence of multiple structural breaks and exploits the cross-section variations and recent second-generation cointegration tests. In addition, we apply different traditional panel cointegration tests. The motivations for our choice of this methodology are clear. We notice that cross-section dependence structural breaks have not received much attention in the previous studies on the stock market returns growth nexus. Second, the financial markets, as well as the economic conjuncture of GCC countries, have undergone a lot of structural changes in the last 20 years. Third, most empirical studies explored this relationship without taking into account the effect of these breaks. Fourth, the exploration of the finance–growth link in GCC countries adds to the body of literature by informing the long-running debate on the role of financial systems in oil-exporting countries undergoing rapid modernization and global integration in achieving economic growth, diversification, and stability. In addition, this study could provide important policy views regarding the development of the financial sector, sovereign wealth fund, financial inclusion, Islamic finance, and the stock market. It also provides lessons for the broader applicability of financial openness, market liberalization, and financial innovation in emerging and developing economies. This study aims to fill this gap and deal with the problem that occurred when modeling such linear relationships.

The rest of the paper is organized as follows: The relationship between financial market openness, stock market return, and economic development is covered in Section 2. The methodology is presented in Section 3. In Section 4, we present an institutional background of the revisited relationship between finance and growth in GCC countries. Section 5 discusses the empirical findings. Section 6 presents the robustness checks of the results. In Section 7, we present the panel error correction models and causality analysis of Engle and Granger (1987). Section 8 concludes the paper and addresses some policy implications.

2. Literature Review

In the early 1980s, McKinnon and Shaw (1973) proposed that financial market openness would foster growth by facilitating better resource allocation and promoting financial development. This view was widely supported by many subsequent studies (King & Levine, 1993b; Levine et al., 2000; Rousseau & Sylla, 2003). These studies argued that well-developed financial systems, which allow for more openness, support economic growth by improving capital allocation, promoting entrepreneurship, and fostering investment. However, the actual impacts of financial openness on growth have been mixed, especially in countries with weak institutional frameworks and unstable macroeconomic conditions. Demirguc-Kunt and Detragiache (1998) pointed out that financial market liberalization, if introduced in an unstable macroeconomic context, could lead to banking instability, rising inflation, and higher unemployment, ultimately resulting in banking crises. This critique is supported by Arestis and Demetriades (1999) and Wolfson (1993), who argue that financial openness in such contexts has not necessarily resulted in the expected growth but rather contributed to banking fragility and crises.

While studies on the finance–growth relationship were strongly documented (King & Levine, 1993b; Levine et al., 2000; Rousseau & Sylla, 2003), less abundant studies that investigated the interaction between financial market openness, the stock market, and economic output (Brada & Iwasaki, 2024; Verberi et al., 2023; Ono & Iwasaki, 2022; Yu et al., 2018; Chiang & Chen, 2016; He et al., 2014). Furthermore, like the inconclusive results of the finance–growth relationship, empirical studies on the impact of financial market openness, the stock market, and economic development also present mixed results. A significant part of the literature supports the positive effect (Balakrishnan et al., 2019; Roychowdhury et al., 2019; Hou & Cheng, 2017; Tanna et al., 2017; Hamdi et al., 2014). However, some other studies support the opposite view (Yu et al., 2018; Batuo et al., 2018; Ahmed, 2013).

Regarding the favorable correlation that exists between financial market openness, the stock market, and economic expansion, Hou and Cheng (2017), using a sample of 31 countries observed during the period 1981–2008, attempted to understand the dynamic relationship between financial development and growth. The effects of financial activities on growth vary depending on the time, income level, and financial development, according to empirical results from the GMM and PMG methods. To ensure sustainable growth, different financial activities should be undertaken by nations with varying levels of development. More recently, Lee and Chou (2018) investigated the relationship between financial openness and financial market liquidity using a sample of 11 countries over the period. The results provide compelling evidence that increased financial market openness raises domestic financial market liquidity. Furthermore, emerging markets are more significantly impacted by financial market openness than developed markets are.

The relationship between financial market openness and financial or banking crisis has been the subject of extensive academic debate. While openness policies are often criticized for exacerbating crises, many argue that they serve more as conduits, revealing underlying vulnerabilities rather than originating them. The distinction line is understanding the interplay between openness and structural conditions within the economy. On the one hand, financial market openness can amplify vulnerabilities in countries with weak institutional frameworks, poor regulatory oversight, and shallow financial markets. For instance, Reinhart and Rogoff (2009) highlight that economies with fragile financial systems are more prone to crises when exposed to volatile international capital flows. Similarly, Stiglitz (2002) argues that premature financial liberalization can destabilize economies lacking the infrastructure to manage external shocks effectively. On the other hand, when supported by robust institutional frameworks, financial market openness can facilitate growth and stability. Kose et al. (2006) emphasize that openness can improve resource allocation, foster financial development, and enhance risk sharing. Moreover, economies with sound macroeconomic fundamentals such as low fiscal deficits, stable monetary policies, and resilient banking systems are better positioned to reap the benefits of openness while mitigating the risks.

The positive relationship between financial market openness and bank efficiency was confirmed in a study by Tanna et al. (2017). The authors used a sample of 88 countries over the period 1999–2011. Findings of the DEA technique indicate that there is a positive effect of financial market openness on the bank TFP growth. Similarly, Ben Rejeb and Boughrara (2013) concluded that financial market openness not only improves the degree of efficiency but also reduces the probability of financial crises. Their study was conducted on a sample of 13 emerging economies observed from January 1986 to December 2008.

The finance–growth relationship was explored by several empirical studies through institutional quality. In countries with strong institutional quality, finance generally leads to a growth in output. However, a negative association was found under a weak institution quality. In this line of ideas, Hamdi et al. (2014) investigated the impact of institutional quality on the financial sector development and economic relationship. The sample is made up of 143 countries over the period 2006–2013. The financial sector is regarded as a critical component of economic development and growth for the entire sample, as well as for developed and developing nations, according to empirical results from GMM. Moreover, the findings indicate that this relationship is stronger for developed nations that benefit from high institutional quality.

Besides the linear relationship between financial market openness, the stock market, and growth, some empirical studies reported that this relationship could be non-linear. For example, Ng et al. (2015) used a sample of a cross-section of 85 jurisdictions to investigate the possible non-linear relationship between the stock market and economic development during a post-crisis period. They found that, only within a certain threshold level of property rights protection, stock market liquidity could have a significant and positive influence on GDP growth.

Several empirical studies related to this topic have been interested in the Asian context. More precisely, using data related to Botswana over the period 1974–2009, Ahmed and Mmolainyane (2014) have reported that financial integration is positively and significantly correlated with financial development. More recently, Wu et al. (2017) used monthly data from Taiwan from January 2003 to December 2009. Empirical findings of the vector autoregressive (VAR) model show that capital flows from foreign investment institutions allow the appreciation of the domestic currency, promote the stock markets, develop the real estate markets, and increase the bond index.

The African context was explored by Misati and Nyamongo (2012). They investigated the conventional relationship between financial market openness and economic development using data from 34 Sub-Saharan African countries observed between 1983 and 2008. The findings of panel cointegration and Granger causality suggest that the financial market openness’s growth-retarding effects outweigh its growth-enhancing ones, which produce contradictory outcomes. The authors also discovered that foreign aid, institutional variables, and the creation of human capital are important contributors to the explanation of growth in Sub-Saharan Africa. Moreover, Badeeb and Lean (2017) examined how oil dependence influences the relationship between financial development and economic growth in Yemen and they found that the positive effect of financial development on economic growth diminishes as oil dependence increases. They suggested that reducing oil dependence and diversifying the economy could enhance the benefits of financial development. Avci and Cetin (2022) examined the link between financial globalization and financial development in Turkey; they found that the financial globalization and economic growth positively influence financial development. Their study highlights the role of financial globalization and structural breaks in shaping the finance–growth relationship, offering insights appliable to other economies. Recently, Karavias et al. (2023) suggested valuable insights into the dynamic relationship between financial markets and economic events, highlighting the importance of accounting for structural breaks in their empirical results. They contribute to the research on the finance–growth nexus in emerging markets, especially those that are oil-dependent or resource-rich.

Some studies take a different stance from those that affirm the link between financial market openness, the stock market, and economic development. They reported that financial integration and stock market liberalization lead to more instability and more chocks. Since the financial market openness process in these countries is implemented in unstable macroeconomic conditions and weak institutional context, as financial systems are less developed, most empirical results support the negative association. For example, Ahmed (2013) investigated the link between financial integration and economic output for a sample of thirty countries from Sub-Saharan Africa (SSA) between 1976 and 2010. The two indicators have a negative correlation, which is supported by empirical findings.

For the same context, Batuo et al. (2018) used a sample of 14 African countries observed during the period 1985–2010. The same results were found. The authors reported that financial development and financial market openness have positive effects on financial instability. The MENA region was explored by Ben Naceur et al. (2008) during the period 1979–2005. Most of the empirical findings point to a short-term negative relationship between stock market development and economic development that eventually improves. Yu et al. (2018) discovered that the volatility of the Chinese stock market, which has been progressively incorporated into the global economy, has been impacted by the global economic policy uncertainty (GEPU) in the context of China.

Empirical studies have consistently demonstrated that macroeconomic stability and institutional frameworks are pivotal in fostering a positive relationship between stock markets and economic growth. Keswani et al. (2024) examined the intricate relationship between macroeconomic variables and the Indian stock market. The findings revealed that stable macroeconomic factors such as controlled inflation and consistent GDP growth, significantly enhance stock market performance, which in turn promotes economic growth. Furthermore, Jabeen et al. (2022) analyzed the relationship between macroeconomic factors and stock market returns, concluding that the stock market accurately reflects selected countries’ economic growth, and stock returns are tightly related to economic indices. In terms of institutional stability, Alim et al. (2024) found that political stability positively and significantly affects current stock market returns, highlighting the importance of stable governance structures in promoting investor confidence and market growth.

3. Revisiting the Finance and Growth Relationship in the GCC Countries: An Institutional Background

While the literature on the finance and growth relationship has been strongly documented (Beck et al., 2000; Carlin & Mayer, 2003; Levine, 2005), in this paper, we revisit this relationship for the following reasons. First, the GCC region is an oil-based area. These states depend on oil and gas extraction, which brings in government revenue, export earnings, and other economic activity. Though countries in this region are making considerable progress towards diversification, the oil sector remains at the heart of banking systems and the long-term economic outlook. Oil wealth may therefore be seen as a key enabler and a possible restraint in the finance–growth relationship in the GCC countries. In the case of higher oil prices, the income from oil resources triggers growth within the financial sector via growing investment, government spending, and infrastructure development. However, the heavy reliance on oil in this region makes it vulnerable to changes in oil prices, especially in periods of financial instability and slower growth when the prices are lower. In this regard, the GCC has increasingly focused on diversifying its economies for sustainable growth by reinvesting oil wealth into non-oil sectors through sovereign wealth funds and diversification strategies.

Second, the financial system of GCC nations is highly developed, having a vital role within their economic structure. This uses a mix of conventional and modern banking, not excluding emerging sectors in Islamic finances. The financial system ensures economic growth, as it allows diversification to emerge from the heavy reliance on oil, acting as an effective driver for development and stability in the region. Additionally, this financial system is qualified as a dual financial system, since it incorporates two different types of financial systems, namely, conventional finance and Islamic finance. This system is unique to this region, whereby both traditional interest-based financial practices and Sharia-compliant, non-interest-based financial practices operate side by side. Whereas both systems have different rules and regulations, they are combined in a manner that promotes diversity and strength in the financial landscape. For instance, in the United Arab Emirates (UAE), the financial and insurance services sector has been a key driver of non-oil GDP growth, which expanded by 4% in the first quarter of 2024 (FitchRatings, 2024). GCC banks exhibit robust financial performance metrics. According to a McKinsey report (McKinsey & Company, 2024), the revenue-to-assets ratio for GCC banks stands at 3.2%, surpassing the global average of 2.3%. This indicates higher efficiency and profitability within the region’s banking sector. GCC banks have demonstrated a strong appetite for international expansion. Fitch Ratings reports that GCC banks’ main exposure outside the region includes subsidiaries in Turkey and Egypt, collectively holding approximately USD 150 billion in assets as of July 2024. The substantial size and international reach of the GCC financial sector underscore the importance of financial openness for economic diversification and growth. However, this openness also necessitates robust regulatory frameworks to mitigate potential risks associated with cross-border financial activities. Ensuring financial stability in the face of global economic fluctuations requires continuous enhancement of regulatory practices and prudent risk management strategies.

Considering the reasons cited above, the study of the finance and growth relationship in the GCC countries can make important contributions to the literature by examining the unique aspects of these economies, including their dependence on oil, efforts at diversification, Islamic finance systems, and financial market development. This will contribute to a deeper understanding of how financial systems can be used to realize sustainable growth, attract investment, and create more inclusive economies in the face of an increasingly changing global environment.

4. Methodology

4.1. Data

The dataset includes six Gulf Cooperation Council nations in a balanced panel for the years 1993–2022. Data relative to the economic output and financial market openness are extracted from the World Development Indicators Database (WDI) and the new database of the Chinn and Ito index of financial market openness. Stock market returns are extracted from the global financial development database (World Bank).

FL (KAOPEN) is the Chinn-Ito index of financial market openness. It refers to the classification of limitations that Mody and Murshid (2005) documented. The higher the value of this index, the lower the restrictions. This index was used in prior studies such as Bhatia and Sharma (2019), Misati and Nyamongo (2012), Gubillas and González (2012), and Mody and Murshid (2005). Savings and investing are the two main ways that the advantages of financial market openness could be translated into increased economic development. (Lee & Chou, 2018; Hou & Cheng, 2017; Tanna et al., 2017; Galindo et al., 2007; Kroszner et al., 2007; Abiad et al., 2008).

SMR is stock market return in %. Theoretical considerations support the idea that stock returns are positively associated with economic development. A positive correlation between asset returns and economic development is predicted by the consumer-based stock-return models of Lucas (1978) and the standard economic development models of Solow, Ramsey, and Diamond. However, the empirical literature does not give unanimous support to these theories. Stock market returns were considered a driver for economic development in several prior studies, such as Dabwor et al. (2020), and Madsen et al. (2013).

Table 1. Variables Definition and Summary statistics.

Variables	GDP				KAOPEN				SMR
Definition	The Natural Logarithm of Real GDP per Capita				Chinn-Ito Index of Financial Market Openness				Stock Market Return in %
Statistics	Mean	StDev	Min	Max	Mean	StDev	Min	Max	Mean	StDev	Min	Max
Panel	4.25	0.308	3.68	4.94	2.04	0.532	1.082	2.374	12.23	27.08	−44.15	133.7
Bahrain	4.14	0.176	3.87	4.39	2.29	0.210	1.309	2.374	−4.94	13.27	−40.39	26.83
Kuwait	4.31	0.301	3.73	4.74	1.55	0.595	1.08	2.37	12.42	25.74	−44.15	78.05
Oman	3.99	0.226	3.68	4.34	2.12	0.457	1.309	2.37	7.53	25.35	−40.6	89.73
Qatar	4.51	0.311	4.11	4.94	2.37	0.012	2.37	2.37	36.75	19.80	−31	46.65
Saudi Arabia	4.05	0.214	3.76	4.40	1.55	0.595	1.082	2.37	5.79	29.39	−38	111.8
UAE	4.50	0.096	4.34	4.66	2.37	0.027	2.37	2.37	15.84	27.84	−38.25	133.7

presents the definition and descriptive statistics for the variables that include financial market openness, stock market return, and economic development. For each variable, Table 1 shows the means, maximums, minimums, and standard deviation for all the variables.

Statistics displayed in Table 1 indicate that, for the GCC panel, on average, the natural logarithm of the real GDP per capita is 4.25 with a maximum value of 4.94 and 3.68 as a minimum value. For the financial market openness, the KAOPEN index of Chinn-Ito, mean value of this index is 2.04. Concerning the stock market return, the average value in the GCC countries over the period 1993–2022 is 12.23%. During the same period, the stock market return in this region records some fluctuating trends. For example, we note that the stock return has a negative value, with −44.15% as the minimum value and a high level with a maximum value of 133.73%.

4.2. Estimation Strategy

To investigate the relationship between financial market openness, stock market returns, and economic development using the following non-stationary panel data equation:

Y_it = f (FL_it; SMR_it)

(1)

where Y stands for economic output, which is calculated using real GDP per capita’s natural logarithm. (constant LCU), FL (KAOPEN) is the Chinn-Ito index of financial market openness and SMR is the stock market return in %, which is the annual stock market return, defined as the percentage change in stock market index values from one year to the next.

The econometric strategy is based on the panel structural breaks. The use of this method helps to identify and understand endogenous variables. These techniques provide insight into the unidirectional and bidirectional causal relationships between these variables and how they change over time. Furthermore, the use of structural models can help to mitigate endogeneity problems and the potential correlation between the explanatory variables and the error term of each model.

The empirical model links the log of real GDP per capita to financial market openness and stock market returns. This approach is grounded in the following theoretical frameworks: Firstly, in economic growth theory, the log of real GDP per capita serves as a proxy for economic development consistent with the Solow growth model and endogenous growth theories. These models emphasize the role of capital accumulation, technological innovation, and efficient resource allocation in economic growth, which are directly influenced by financial openness and stock market performance. Secondly, financial liberalization hypothesizes that financial market openness, measured via the Chinn-Ito index, impacts growth by enhancing capital allocation, attracting foreign investments, and fostering financial innovation (McKinnon & Shaw, 1973; King & Levine, 1993). Lastly, Stock Market Theories: Stock market returns capture the efficiency of financial markets in mobilizing savings, providing liquidity, and facilitating investments in productive projects (Lucas, 1978; Brown et al., 2017). However, the negative impact observed in our findings aligns with theories suggesting that high volatility and susceptibility to external shocks may offset these benefits.

The combination of levels (log of GDP per capita) and returns (stock market returns) in the model addresses their distinct roles in the economic system: GDP per capita reflects the aggregate economic output and long-term development. Stock market returns, as a percentage change, capture short-term financial performance and market dynamics. This distinction aligns with prior studies (Hou & Cheng, 2017; Tanna et al., 2017) that highlight the interplay between stock market activity and economic growth.

To estimate Equation (1), the empirical strategy performed in this study is based on five steps. First, cross-section dependence tests are applied to verify the consideration of cross-section dependence. Second, Panel unit root tests are then used to determine the order of integration among the variables, with and without cross-section dependence and structural breaks. This is a necessary step before estimating long-run relationships. The third, first, and second generations of panel cointegration tests are conducted to determine the long-run relationship among the variables. Fourth, we determine the structural breaks country by country. Fifth, the dynamic and fully modified ordinary least square (DOLS and FMOLS) estimators are used to estimate heterogeneous long-run coefficients.

5. Empirical Results

5.1. Cross-Sectional Dependence Tests

Table 2. Tests of cross-sectional dependence.

	Y	FL	SMR
Pesaran et al. (2004); CD test	22.298 ***	38.831 ***	62.555 ***
Pesaran et al. (2008); LMadj test	18.377 ***	35.222 ***	50.297 ***

Notes: *** denotes significance at 1%.

presents the result of cross-sectional dependence. Results obtained from Pesaran et al. (2004) CD and Pesaran et al.’s (2008) LM_adj tests for cross-sectional dependence show that, at a significance level of 1%, the null hypothesis that there is no cross-section dependence in the errors is strongly rejected.

5.2. Panel Unit Root Tests

On the one hand, most first-generation unit root tests applied to the three variables of the model reject the hypothesis of the absence of a unit root and accept the integration of order one (I (1)). On the other hand, given a study period of 30 years, the consideration of transversal dependence and structural breaks should provide more reliable results.

The panel unit root test results are summarized in

Table 3. First- and Second-generation Panel unit root tests.

			Y	dY	FL	dFL	SMR	dSMR
Traditional Panel unit root tests	Harris and Tzavalis (1999) Rho-stat	without time trend	0.9344	0.031 ***	0.8777	−0.132 ***	0.315 ***	−0.299
		time trend included	0.7602	0.051 ***	0.6187	−0.141 ***	0.236 ***	−0.399
	Levin et al. (2002) T-stat		−0.6974	−4.73 ***	−1.5893	−1.1175	−1.2592	−6.9880 ***
	Im et al. (2003) W-stat		1.1777	−5.27 ***	−1.4321	−3.2042 ***	−3.5963	−13.189 ***
Panel unit root test with cross-section dependence	Pesaran (2007) CIPS-stat		−0.155	−5.33 ***	−1.997	−1.989 **	−3.44 ***	−10.111 ***
Panel stationary test with and without structural breaks	Lluís Carrion-i-Silvestre et al. (2005) LM(λ)-test	No breaks	1.009	-	1.023	-	−2.018	-
		Breaks	1.277	-	1.118	-	−2.555	-

Notes: *** at the 1% level of statistical significance, ** at the 5% level of statistical significance. Asymptotic normality is assumed by the LLC and IPS tests. The Schwarz Information Criterion’s empirical realizations guide the selection of lag levels for the IPS test. The Bartlett kernel with automatic bandwidth selection is used to compute the LLC test. The number of common factors for the Pesaran (2007) test is set at 1. Using LWZ information criteria, the number of breakpoints for the Lluís Carrion-I-Silvestre et al. (2005) test has been estimated, allowing for a maximum of m = 5 structural breaks. As in Andrews (1991), the Bartlett kernel with automatic spectral window bandwidth selection is used to estimate the long-run variance.

. The inclusion of the cross-section dependence via the Pesaran test (2007) shows that KAOPEN and GDP per capita are integrated into order one. When applying two Lluís Carrion-i-Silvestre et al. (2005)1 tests (with and without structural breaks) it is observed that the three series are non-stationary.

Once integration and non-stationarity are established, the next step is to determine whether a long-run relationship between GDPs per capita, KAOPEN index, and Stock market returns exists through cointegration tests.

5.3. Panel Cointegration Tests

To examine the existence of a long-run relationship between the three series, we use two types of cointegration tests first- and second-generation. Results of both tests of cointegration are provided in

Table 4. First generation Panel cointegration tests.

Pedroni’s Test
(Within-dimension)	Statistic	Prob.	(Between-dimension)	Statistic	Prob.
Panel v-Statistic	−0.9991	0.6752	Group rho-Statistic	2.3308 *	0.0652
Panel rho-Statistic	1.1809	0.2963	Group PP-Statistic	2.2110 **	0.0419
Panel PP-Statistic	1.2202	0.8110	Group ADF-Statistic	1.2121	0.181
Panel ADF-Statistic	1.1115	0.7979
Kao’s test
ADF-stat   0.7367   0.1162

Notes: Pedroni’s statistics have a standard normal distribution asymptotically. The other Pedroni tests are left-sided, but the variance ratio test is right-sided. The null hypothesis is that the variables are not cointegrated. Every statistic has a standard normal distribution under the null hypothesis. Statistical significance is shown by ** and * at the 5% and 10% levels, respectively.

and

Table 5. Second generation Panel cointegration test with structural breaks and cross-section dependence for Westerlund and Edgerton (2008).

Model	${\mathit{Z}}_{\mathit{\tau }}\left(\mathit{N}\right)$	${\mathit{Z}}_{\mathit{\phi }}\left(\mathit{N}\right)$
No breaks	3.115 *** (0.0009)	1.0852 ** (0.0218)
Mean shift	2.628 * (0.0661)	1.6619 ** (0.0317)
Regime shift	2.755 * (0.0627)	5.0952 (0.1237)

Notes: For this test, the lag length is chosen automatically according to Campbell and Perron’s (1991) methodology. We employ three breaks, which are found at the minimum of the sum of squared residuals using grid search. Based on a one-sided test using the normal distribution, the p-values are provided. The LM-based test statistics $Z\varphi \left(N\right)$ are normally distributed. The information criterion put forth by Bai and Ng (2004) is used to determine the maximum number of common factors, which is set at 5. ***, ** and * denotes statistical significance at the 1%, 5% and 10% levels.

.

Pedroni’s (2004) test results indicate that all tests, except for Group-ρ-stat and Group-PP-stat, accept the null hypothesis of no co-integration. Similarly, the Kao test (1999) yields the same result. We did not manage to find a long-run balance between GDP, KAOPEN, and SMR through these two types of tests since they did not consider the prospective economic dependences or the structural breaks. Since 1993, GCC countries have followed policies of economic, financial, and stock market openness. Indeed, the countries of this region have undergone structural changes, mainly due to the implementation of reforms aimed at developing their financial markets. We propose a cointegration test of Westerlund and Edgerton (2008).

We use the LM-based tests that take structural breaks and cross-section dependence into account at the same time, as suggested by Westerlund and Edgerton (2008). Both test statistics Zφ(N) and Zτ(N) reveal evidence in favor of a cointegration relationship with dependencies and structural breaks between the stock market return index, financial market openness index, and real GDP per capita for the three regressions: no breaks, mean shift, and regime shift. In addition. The Bai and Perron (1998) approach is used to determine the location of structural breaks;

Table 6. Estimates of Breaks.

Countries	Break Number	Break Date (s)
Bahrain	2	1995–2008
Kuwait	1	2009
Oman	3	1994–2002–2009
Qatar	3	1996–2004–2009
Saudi Arabia	1	1996
United Arab Emirates	1	2007
Country	Likely Events Leading to Structural Breaks
Saudi Arabia	Oil price shocks (e.g., 2014–2016), Vision 2030, geopolitical tensions (e.g., Yemen, Iran), VAT introduction, and public sector reforms.
Kuwait	Gulf War (1990–1991), oil price shocks, political gridlock, governance reforms, and global financial crises.
UAE	Oil price volatility, Expo 2020, diversification into finance/tourism, regional conflicts.
Qatar	Qatar Blockade, 2017, LNG price fluctuations, and economic diversification (Qatar National Vision 2030).
Oman	Oil price shocks, political transition post-Sultan Qaboos, diversification initiatives (Vision 2040).
Bahrain	Oil price dependency, 2008 financial crisis, political instability (2011 uprising), financial sector evolution.

shows the contemporaneously estimated breaks for each nation.

Table 6 presents the detected break dates. Statistics displayed in this table indicate that the relationship between the three variables is non-linear. Hence, it confirms that there are breaks for all countries used in this study. Most empirical studies that explored this relationship have not considered the effect of these breaks. This study comes to fill this gap and to deal with the problem that occurred when modeling such a linear relationship.

Another important feature that can be observed from Table 6 is that there are almost similar break dates for all countries. This similarity is explained by the economic and financial interdependence of the GCC countries. A single break date in one nation can have an immediate impact on all other nations. Most structural breaks can be traced back to the global financial crisis that occurred between 2007 and 2009, or to specific dates associated with the financial market openness policies that these countries started in 1995. This crisis had a significant impact on GCC stock yields and accelerated the flow of shocks from the world financial markets to the GCC nations’ stock markets. There is a chance that some other break dates will line up with national economic news.

5.4. Results of Panel Long-Run Relationship: FMOLS and DOLS

Having established co-integration among the variables, next, using Fully Modified Least Squares (FMOLS) and Dynamic Ordinal Least Squares (DOLS), the long-term relationship between financial market openness, stock market return, and economic development is estimated. The results are shown in

Table 7. Panel cointegration estimation (Dependent variable; Y).

	FMOLS	DOLS
FL	0.0338 ** (2.658)	0.0113 *** (4.789)
SMR	−0.3660 ** (−2.7757)	−0.1871 * (−1.881)

***, ** and * denotes statistical significance at the 1%, 5% and 10% levels, respectively. The values in parentheses are t-students.

.

The results of this set of estimations show that the financial variables included in the model have a long-term impact on GDP per capita, reinforcing the theoretical under pinnings of both neoclassical growth models (Solow, 1956) and endogenous growth theories (Romer, 1990; Levine, 1997). These models suggest that financial liberalization enhances capital accumulation and technological diffusion, which are essential for sustained economic growth. By emphasizing the critical role of financial market openness in shaping economic growth in GCC countries, our findings align with the financial liberalization hypothesis (McKinnon and Shaw, 1973), which posits that removing restrictions on capital flows enhances financial development, thus improving resource allocation and risk-sharing mechanisms.

In contrast to previous studies, our findings extend the work of Lee and Chou (2018) and Hou and Cheng (2017) by providing empirical evidence specifically within the context of GCC economies. We demonstrate that financial openness not only contributes to GDP growth but also highlights the unique challenges posed by oil price volatility on stock market performance, a factor less emphasized in prior research. Our results also resonate with the conclusions of Kroszner et al. (2007) and Abiad et al. (2008), who found that capital inflows boost investment and productivity, but we add to this literature by illustrating how GCC countries face distinct vulnerabilities due to their economic structure. Furthermore, recent studies such as those by Olalere and Mukuddem-Petersen (2023) underscore the importance of competition in driving corporate investment and innovation, suggesting that economic policy uncertainty influences these dynamics. Our findings complement this perspective by emphasizing that while financial development facilitates capital access and supports investment, it is essential to recognize the potential negative impacts of increased global integration, as observed in the mixed long-run relationship between stock market returns and economic growth. This divergence from the positive relationship noted by Brown et al. (2017) highlights the unique characteristics of GCC stock markets, which are heavily influenced by oil price fluctuations, potentially undermining their effectiveness as stabilizing economic forces (Syed & Bouri, 2022).

Overall, our study contributes to the literature not only confirming the positive effects of financial openness on economic growth but also by emphasizing the importance of implementing robust financial policies that address the specific vulnerabilities of GCC economies. Strengthening financial institutions and enhancing regulatory frameworks will be critical to maximizing the growth enhancing effects of financial market openness while mitigating the risks associated with external shocks (Bley & Chen, 2006; Alhassan, 2019).

6. Robustness Checks

For robustness tests, we estimate the same model for each country.

Table 8. Long-run output coefficients for individual countries.

	FMOLS		DOLS
	FL	SMR	FL	SMR
Bahrain	0.2523 (0.112)	0.2180 * (1.745)	0.3327 * (1.882)	0.5443 ** (2.759)
Kuwait	−0.1914 (−0.129)	−0.3391 (−0.668)	−0.1330 (−1.002)	−0.2649 (−0.750)
Oman	0.8269 (1.008)	0.1633 (0.178)	0.7229 (1.205)	0.1117 (0.160)
Qatar	0.5556 ** (2.223)	0.4242 *** (1.986)	0.6211 ** (3.315)	0.7787 ** (2.413)
Saudi Arabia	−0.7662 * (−1.955)	−0.6995 ** (−2.513)	−0.4936 ** (−4.998)	−0.5121 ** (−2.299)
UAE	0.0651 ** (2.199)	0.2233 * (1.974)	0.2169 ** (2.716)	0.2727 ** (3.921)

***, ** and * denotes statistical significance at the 1%, 5% and 10% levels, respectively. The values in parentheses are t-students.

reports the empirical results.

Empirical results displayed in Table 8 and relative to individual countries indicate that financial market openness and stock market return exert a positive and significant effect on economic development in Bahrain, Qatar, and the UAE. For financial openness, these countries have opened up their financial markets, allowing foreign investors to purchase stakes in local companies. This raises the capital inflows, providing more financial resources for companies to conduct business expansion. Foreign investors also bring in technical know-how, managerial skills, and governance improvement, which make local companies operate better. This renders the companies more efficient, productive, and competitive in the global market. In addition, higher investment in areas such as real estate, technology, logistics, and tourism diversifies the economy away from oil dependence. Local companies can raise capital from foreign investors when domestic financial markets are open through bond issuance or stock markets. This enables companies to fund expansion, hire more workers, and invest in new technologies, leading to higher productivity and GDP growth. Besides, an open market of finance encourages financial and banking competition, leading to greater efficiency and lower costs for consumers and businesses. New financial services appear to drive economic diversification and modernization.

Theoretically, the outcome is explained by at least two theories. First, the theory of financial liberalization proposed by McKinnon and Shaw (1973) asserts that with financial constraints removed, savings and investment will grow. Foreign capitals come into open financial markets and thereby boost domestic investments and productivity and thus economic growth. In the UAE, Qatar, and Bahrain, liberalization of financial markets has promoted foreign direct investment (FDI) and portfolio investment, which stimulates the growth of non-oil sectors. Second, the theory of endogenous growth of Romer (1986) and Lucas (1988) identifies the contributions of human capital, technological progress, and financial deepening to long-term economic growth. Financial openness enables knowledge spillovers, enhanced corporate governance, and effective allocation of capital, which stimulate economic productivity. Financial liberalization promotes business growth, innovation, and entrepreneurship in the GCC economies, promoting long-term growth.

Empirically, several prior studies have confirmed this result. For example, Seti et al. (2025) for emerging and developing economies, Gizaw et al. (2024) for emerging African and Asian countries, and Usman (2023) for China’s economy, all these studies supported the positive relationship between financial openness and economic growth.

As regards stock market return, improved returns increase confidence among investors, and companies issue new issues of stock or bonds to raise capital. Therefore, companies utilize such funds for growth, research & development, and recruitment, inducing greater productivity and economic activity. In Bahrain, Qatar, and the UAE, robust stock markets diminish dependence on oil-based revenues by inducing development in non-oil sectors such as finance, tourism, and technology. This diversification of the economy minimizes dependence on oil prices and generates enduring growth.

This result is in line with the efficient market Hypothesis of Fama (1970), share prices capture all available information; hence stock markets are a good indicator of economic conditions. An increase in the stock market indicates good expansion performance by firms, which will create investment optimism and economic activity. Expansion in stock markets in the UAE, Qatar, and Bahrain is first followed by an increase in investor activity and corporate growth, leading to economic advancement. Moreover, the Levine (1997) nexus of financial development and growth implies that financial development increases economic growth via a number of channels including mobilization of savings, provision of liquidity and risk reduction.

Several prior studies have confirmed this result. For example, Patatoukas (2021), Dabwor et al. (2020) for the Nigerian economy and Pan and Mishra (2018) for China.

Unlike Bahrain, Qatar, and UAE, we found that financial market openness and stock market return do not exert any significant effect on economic growth in Kuwait and Oman. However, we find that both financial market openness and stock market decrease economic growth in Saudi Arabia. Although growth in the stock market and financial market openness are widely regarded as the engines of economic growth, they can be detrimental to economic growth under some circumstances. In Saudi Arabia, the drivers can cause financial weaknesses, capital misallocation, and economic instability. The following is a detailed explanation of how this occurs. Financial openness enables investors to transfer capital across borders easily. Though this lures foreign investment, it also puts the economy at risk of sudden capital flight. In case of perceived economic or political risk, investors are able to pull investments quickly. For instance, when Saudi Arabia saw a decline in the price of oil during 2015–2016, foreign investors lost faith in the economy, leading to massive capital outflows that were straining the foreign reserves as well as the currency. Additionally, when capital is leaving the country, the state must employ foreign reserves to fund the currency peg, which results in draining the reserves and promoting inflation. As asset prices inflate, increasing buying power. For instance, in the period 2018–2019 characterized by a capital inflow, inclusion of the Saudi market in the MSCI Emerging Markets Index drew enormous foreign investment, pushing stock prices and distending asset prices. Financial liberalization can divert Saudi capital overseas, lowering domestic investment in small and medium enterprises and strategic sectors.

With regard to the stock market, excess volatility has deterred long-term investment since companies and investors cannot anticipate future trends and uncertainty regarding returns discourages investment in industry and infrastructure projects. On this front, Saudi Arabia’s Tadawul in 2020 fell sharply with the outbreak of the COVID-19 pandemic, triggering panic selling and economic downturn.

In Saudi Arabia, financial liberalization and stock market growth can lead to economic instability, speculative bubbles, and misallocation of capital that can inhibit long-term growth. The theoretical basis of these adverse effects relies on a number of influential economic theories that describe why excessive financial openness and volatile stock market growth can be harmful to economic progress. Financial liberalization results in over-risk-taking and financial instability, according to the Minsky (1977) financial instability hypothesis. Low-cost capital inflows in an open capital market lead to asset bubbles and credit booms and can result in financial crises due to an unanticipated flight of capital. Foreign capital inflows rise exponentially during Saudi Arabian oil booms but flee very rapidly during recessions, resulting in economic shocks. Furthermore, the 2015–2016 oil price crash triggered massive capital flight, compelling the government of Saudi Arabia to utilize hundreds of billions of dollars in foreign exchange reserves to suppress the economy. In addition, the Rodrik & Velasco (2000) capital flight and volatility theory defines that greater financial openness enhances the probability for capital flight, where investors quickly withdraw funds due to economic uncertainty. Therefore, foreign investors pull out capital at high velocities during policy uncertainty or oil shock. In such a scenario, the 2022 U.S. Federal Reserve tightening caused the withdrawal of foreign capital from Saudi markets and brought about stock price declines.

This result is divergent form the findings of Seti et al. (2025) for emerging and developing economies, Gizaw et al. (2024) for emerging African and Asian countries, Usman (2023) for China’s economy, Patatoukas (2021), Dabwor et al. (2020) for the Nigerian economy and Pan and Mishra (2018) for China who supported a positive and significative effect of financial openness and stock market return on economic growth.

7. Panel Error Correction Models and Causality Analysis

We examine the following panel (vector) error correction model (PVECM) using Engle and Granger’s (1987) method:

$${∆Y}_{it}={\alpha }_{1i}+{\sum }_{j=1}^{m-1}{\beta }_{1ij}{∆Y}_{i,t-j}+{\sum }_{l=0}^{m-1}{\phi }_{1il}{∆FL}_{i,t-l}+{\sum }_{r=0}^{m-1}{\gamma }_{1ir}{∆SMR}_{i,t-r}+{\delta }_1{ECM}_{i,t-1}+{\mu }_{i,t}$$

(2)

$${∆FL}_{it}={\alpha }_{2i}+\sum _{j=1}^{m-1}{\beta }_{2ij}{∆FL}_{i,t-j}+\sum _{l=0}^{m-1}{\phi }_{2il}{∆Y}_{i,t-l}+\sum _{r=0}^{m-1}{\gamma }_{2ir}{∆SMR}_{i,t-r}+{{\delta }_{2}ECM}_{i,t-1}+v_{i,t}$$

(3)

$${∆SMR}_{it}={\alpha }_{2i}+\sum _{j=1}^{m-1}{\beta }_{2ij}{∆SMR}_{i,t-j}+\sum _{l=0}^{m-1}{\phi }_{2il}{∆Y}_{i,t-l}+\sum _{r=0}^{m-1}{\gamma }_{2ir}{∆FL}_{i,t-r}+{{\delta }_{2}ECM}_{i,t-1}+{\omega }_{i,t}$$

(4)

where ECM stands for error correction term (ECT) and the Schwarz information criterion (SIC) is used to determine the ideal number of lag terms that the ECM models in (2)–(4) should include. The models mentioned above emphasize both the short-term mechanisms for adjustment towards equilibrium and the long-term relationship. Furthermore, one can perform causality tests using these models. We will indeed discuss two kinds of causality: long-run and short-run.

Table 9. Long run long run.

	t-Stat	F-Stat
Y	−2.7177 *** (0.0017)	6.5218 *** (0.0055)
FL	−1.3328 (0.2274)	2.3217 (0.8874)
SMR	−1.0774(0.1669)	3.1289(0.6666)

*** denotes significance at 1%.

demonstrates the long-term causal relationship between financial openness, stock market return to economic growth. Likewise, reversing the path—that is, going from Y and SMR to FMO and from Y and FMO to SMR—does not support this long-term causality.

Results displayed in

Table 10. Short Run Causality, GDP equation.

	F-Stat	Wald-Stat
FL→Y	1.8822 (0.5325)	4.5236 (0.1995)
SMR→Y	−2.6837 ** (0.028)	6.4448 ** (0.0210)
SMR→FL→Y	1.8876 (0.1672)	8.0194 (0.1992)

** denotes significance at 5%.

show a unidirectional causality running from stock market return to economic growth. Stock market returns in the short term can affect economic growth via different transmission channels. Economic growth in the GCC nations is affected positively by stock market returns via increased investment, liquidity effects, and the wealth effect. The effect is not always, nevertheless, long-term, and volatility that is excessive can be harmful. The relationship is typically explained with the assistance of some economic theories. According to the wealth effect theory of Keynes (1936) higher stock market returns enhance investor wealth, which leads to higher consumer spending and investment. The higher demand stimulates economic activity, raising short-term GDP growth. Additionally, the liquidity Hypothesis of Bencivenga & Smith (1991) asserts that a well-performing stock market provides liquidity, because of which it becomes simple for companies to obtain money for short-term investment. The GCC countries have increased banking sector linkage with share markets; hence strong market performance translates to stronger credit availability. This result is in line of the work of Guglielmo et al. (2004) for a sample of countries that includes Argentina, Chile, Greece, Korea, Malaysia, Philippines and Portugal.

Findings also indicate that there is no causal relationship either between financial openness and economic growth or running from financial openness and stock market return to economic growth.

Findings in

Table 11. Short Run Causality, FL equation.

	F-Stat	Wald-Stat
Y→FL	1.3116 (0.6758)	3.1313 (0.2110)
SMR→FL	−3.4611 *** (0.0065)	5.3977 ** (0.0364)
SMR→Y→FL	0.3159 (0.1997)	5.2111 (0.3719)

*** denotes significance at 1%, ** denotes significance at 5%.

support only a unidirectional causality in the short-run running from stock market return to financial openness. In the short term, the stock market returns can generate financial openness in the GCC nations via some important channels. This causal link is founded on economic theory and empirical facts that demonstrate how better stock market performance pulls in foreign investors, affects capital flows, and determines financial liberalization policy. Within the portfolio investment theory of Froot & Stein (1991), increasing stock market returns render foreign markets more attractive to foreign investors. In the same vein, high returns convey profitability and stability and lead to higher capital inflows and an open financial market. Indeed, the signaling theory of Stiglitz & Weiss’s (1981) describes how stock market development sends the signal of economic health, encouraging policymakers to relax financial controls and become more open to additional foreign capital. Summarily, stock market returns encourage financial openness in the GCC countries by inducing foreign investment, improving liquidity, and encouraging liberalization in regulation. However, this relationship could be impaired by volatility and external shocks, and therefore there is a need for prudent policy management. This finding corroborates the results of Tongurai and Vithessonthi (2023) for a sample of 164 countries.

Finally, results in

Table 12. Short Run Causality, SMR equation.

	F-Stat	Wald-Stat
Y→SMR	1.0118 (0.9743)	3.6541 (0.4421)
FL→SMR	0.3333 (0.8892)	1.1124 (0.9893)
FL→Y→SMR	0.3699 (0.1993)	7.7522 (0.6663)

do not support any causal relationship in the short-run within the three directions: i) from economic growth to stock market return, ii) from financial openness to stock market return, and iii) from financial openness and economic growth to stock market return.

8. Conclusions and Policy Recommendations

Motivated by the consequences of structural change undergone by the financial markets as well as the economic conjuncture of GCC countries in the last 20 years, this paper aims to examine financial market openness, stock market return, and economic development. To achieve this goal, we used a balanced panel of 6 Gulf Cooperation Council countries over the period 1993–2022. As an empirical approach, we performed a multivariate analysis based on the cointegration test and Panel Error Correction Model (PECM).

More specifically, the empirical strategy was based on five steps. First, to ensure that cross-section dependence is considered, cross-section dependence tests were used. In the second step in figuring out the variables’ integration order and testing long-term relationships, panel unit root tests with and without structural break dependence were performed. The third, first, and second generations of panel cointegration tests were conducted to determine the long-run relationship among the variables. Fourth, we determined the structural breaks country by country. Fifth, to estimate heterogeneous long-run coefficients, the dynamic and fully modified ordinary least square (DOLS and FMOLS) estimators were employed.

Overall, empirical findings from multiple panel tests strongly support both the long-term negative correlation between growth and stock market return and the long-term positive impact of financial market openness on economic development. The positive association between financial market openness and economic development was supported by the fact that GCC countries have joined the global trend by opening their domestic capital markets to foreign investors and institutions. This policy offers many opportunities for GCC countries by mobilizing financial resources, facilitating risk management, allocating resources to the most efficient projects, and monitoring financial resource utilization.

However, the international integration of GCC countries that makes potential risks arise and makes economies more vulnerable to external financial crises can explain the negative relationship between the stock market and economic development. In general, increased integration causes volatility, which disrupts the effective distribution of savings and investments, prompts businesses to postpone investments, and lowers economic welfare.

When we estimate regression relative to individual countries, we found that financial market openness and stock market return exert a positive and significant effect on economic development in Bahrain, Qatar, and the UAE. On the contrary, a negative association was found in Saudi Arabia. For Kuwait and Oman, we found that both financial market openness and stock market return do not exert any significant effect on economic development. Our findings highlight the unique dynamics of the finance–growth relationship within the GCC region, emphasizing the dual influence of financial market openness and stock market performance on economic development. While the GCC’s reliance on oil revenues, its dual financial systems, and rapid economic modernization provide a distinct context, the results underscore broader lessons. Specifically, the positive long-run impact of financial market openness suggests that other regions pursuing liberalization and economic diversification could experience similar benefits, provided they maintain institutional stability and strong regulatory frameworks. At the same time, the observed negative relationship between stock market performance and growth serves as a cautionary insight for economies highly integrated into global financial systems. This is particularly relevant for resource-rich or emerging markets that may share vulnerabilities to external shocks. Future research could extend the applicability of these findings by investigating the finance–growth nexus in similar economic contexts, including non-GCC oil-dependent nations and other emerging regions with evolving financial systems.

The results of this paper can be of great importance for both academicians and policymakers. First, the GCC countries should strengthen their stock markets by improving investor confidence and creating a more diversified, stable economy. This, in turn, will spur economic growth by attracting more investment, creating jobs, fostering innovation, and providing businesses with access to capital for expansion. Second, several methodological concerns and recommendations need to be noted. Several actions and steps should be taken by GCC countries to ensure strong regulation, effective supervision, and an efficient financial market. It is recommended that the countries of Bahrain, Qatar, and the UAE continue their liberalization process with more attention to the institutional and macroeconomic context stability. The sequence of the financial market openness process can significantly ensure the success or the failure of this program. For the other countries, strong work is needed to modernize the financial market and to ensure its stability at the same time. Third, more action and financial economic reforms should be implemented to establish a stable institutional and macroeconomic framework able to implement a program of financial market openness. Finally, GCC economies can benefit from financial openness backed by a solid and transparent stock market. Through the influx of foreign and domestic capital, encouraging market innovation, improving governance, and increasing financial inclusion, these nations can diversify their economies, decrease their dependence on oil, and establish a more robust financial system that benefits both investors and the overall economy.

Although the results of this paper have substantial policy implications, this study has some limitations. First, GCC economies are still heavily reliant on oil revenues, which means that finance and growth in these countries are often influenced by global oil price fluctuations rather than financial sector dynamics only. However, in this study, we have not introduced the variable of oil price. Second, governments in GCC countries play a significant role in the financial markets, both as regulators and as key stakeholders in large state-owned enterprises. Nevertheless, no government intervention variables were considered in this study.

As future research on the relationship between finance and economic growth in the GCC countries, the introduction of other variables such as oil prices, government intervention, culture, and behavioral finance could provide more interesting results. Additionally, the level of financial inclusion, financial integration, and engagement in corporate social responsibility and sustainability practices could moderate the finance and growth relationship in the GCC countries.