Dynamic transmissions between the U.S. and equity markets in the MENA countries: New evidence from pre- and post-global financial crisis

Abstract

JEL classification: G1 G15 F44 Keywords:Volatility spillovers Dynamic correlations MENA markets a b s t r a c tIn this paper we investigate equity returns and volatility co-movement between the U.S. and a group of large Middle East and North African stock markets before and after the global financial crisis in 2008. Our empirical evidence suggests that the pre-crisis relation with the U.S. was weak and negligible, before it jumped to a high level after the crisis. The large diversification in the pre-crisis period was negatively influenced by higher transmissions after the crisis. However, it did not completely disappear during periods of stress. Moreover, there is some evidence that the association with the U.S. has started to revert to its initial low level and therefore, we may conclude that the Middle East and North African equities are important diversifiers for U.S. investors; particularly in the long run.

Did Developed and Developing Stock Markets React Similarly to Dow Jones During 2008 Crisis?

“…Accordingly, in the second period, the response of the emerging markets (except Shanghai) to the return changes on the DJIA decreased. This finding is consistent with that of Meric et al [15], Wang [14], Zhang and Li [19], Maghyereh et al [20], Boubaker et al [17], and Olbryś and Majewska [13]. However, according to our findings, the response of developed markets to changes in returns on the DJIA has increased in the second period compared to the first period.…”

“…There are some studies that examine the relations between US stock markets and other stock markets for different time gaps related with the GFC [13][14][15]. On the other hand, it was noted that the correlation between stock markets increased in times of crisis [15][16][17][18][19][20].…”

“…Besides, impulse and response tests say that the effect of the US market becomes more important in a time of crisis rather than in pre-crisis time. Maghyereh et al [20] observed that MENA equity markets moderately correlated to pre-GFC US market and the structure of the relationship increased during the GFC. So, the integration level between the markets during the GFC has risen.…”

Improving portfolio diversification: Identifying the right baskets for putting your eggs

“…The diversification premiums have recovered in the post‐crisis period, although they are still smaller than those of the pre‐crisis period. This finding is consistent with the observations of Yang, Kolari, and Min () and Maghyereh, Awartani, and Hilu (), who observe that financial markets are generally more integrated in the post‐crisis period than in the pre‐crisis period.…”

Financial stress dynamics in the MENA region: Evidence from the Arab Spring

“…Recent studies that investigated interdependence between stock markets in the MENA region include Chau, Deesomsak, and Wang (2014), Lagoarde-Segot and Lucey (2009) and Neaime (2005Neaime ( , 2016. Other papers have focused on volatility spillover and interconnectedness between MENA stock markets and advanced equity markets (see e. g., Darrat, Elkhal, & Hakim, 2000;Graham, Kiviaho, Nikkinen, & Omran, 2013;Maghyereh, Awartani, & Hilu, 2015;Neaime, 2012. ).…”