The GCC stock markets witnessed severe corrections in 2006 which raised questions about how to cope with the crisis. This paper discusses the major factors that led to the price slump, namely liquidity driven overvaluations and herd behavior in a market that has been dominated by retail investors. Based on this analysis, factors are outlined that could lead to a more balanced future development of GCC capital markets, most notably a broader spectrum of asset classes, increased participation of institutional investors, stricter control of margin lending, and improvement of market infrastructure and corporate governance.
