Behavioural heterogeneity and stock market dynamics during the COVID-19 pandemic and Ukraine war: An empirical Markov Switching analysis of the GCC countries

Abstract

This study investigates the effects of two global crises: the COVID-19 pandemic and the Russia-Ukraine conflict, on stock market dynamics in GCC countries. The study employs the Markov Switching Model (MSM) to analyze investor behavior during three distinct subperiods: the quiet pre-crisis period, the COVID-19 pandemic, and the Russia-Ukraine conflict. The findings reveal that fundamentalists, contrary to traditional economic assumptions of price correction, often exhibited destabilizing effects, particularly in Kuwait, Oman, and Qatar during low-volatility periods. Chartists, by contrast, demonstrated a consistently positive and significant influence, reinforcing momentum-based trading patterns. Empirical results also indicate that during the calm period, Bahrain and Kuwait were believed to remain under stable market conditions for a longer duration, whereas Saudi Arabia showed lower stability and experienced extended periods of volatility. During the COVID-19 period, most GCC countries shifted toward high-volatility regimes, with longer durations of market instability. During the Russia-Ukraine war, Bahrain, Saudi Arabia, and the UAE continued to experience sustained high volatility and prolonged unstable periods. The practical implications of this paper show that heterogeneous investor behavior, especially the destabilizing actions of fundamentalists and momentum-driven chartists, significantly affect GCC market dynamics during crises. Regulatory strategies should focus on monitoring trading patterns, managing risk, and promoting long-term investment to enhance market stability in turbulent conditions.