In this paper, we document the main factors underlying the foreign portfolio inflows to Gulf Corporation Council countries (hereafter GCC) by employing a recently published database of cross-country portfolio holdings by the International Monetary Fund. We find that bilateral factors such as trade volume and debt to GDP ratio between the source and GCC (host) countries play a truly significant role in determining the volume of cross border portfolio inflows to GCC markets. Particularly, there is a strong correlation between trade volume and the volume of portfolio inflows. This connection becomes even stronger over time. Moreover, GCC members’ stable fiscal position (lower debt to GDP ratio) is practically one of the important determinants of the volume of portfolio inflows to GCC markets. Specifically, for the international bond holders, the foremost motivation for investing cross borders is the absence of default risk and the higher return in comparison to other countries. We have also found that the extent of openness in capital account transactions and the income level of source country are additional factors that help to explain the volume of foreign portfolio inflows to GCC members. Last but not least, although there is a remarkable increase in the volume of the international portfolio inflows to GCC countries, there also exists a “GCC bias”, a huge share of the portfolio inflows to GCC markets is coming from the GCC countries. This bias is the notable consequence of the high level financial and economic integration that characterizes the GCC countries as they are heading towards a monetary union. A similar bias occurs in European Union markets as well.
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