Return Dynamics and Volatility Spillovers Between FOREX and Stock Markets in MENA Countries: What to Remember for Portfolio Choice?

Abstract

This article investigates the interdependence of stock-forex markets in MENA (Middle East and North Africa) countries for the February 26, 1999 to June 30, 2014 period. The analysis has been performed through three competing models: the VAR-CCC-GARCH model of Bollerslev [1990]; the VAR-BEKK-GARCH model of Engle and Kroner [1995]; and the VAR-DCC-GARCH model of Engle [2002]. Our findings confirm that both markets are interdependent and corroborate the stock and flow oriented approaches. We also find that, comparing to optimal weights, hedge ratios are typically low, denoting that hedging efficiency is quite good. Our estimation of hedging efficiency suggests that incorporating foreign exchange in a full stock, unhedged portfolio increases the risk-adjusted return while reducing its variance. (We note here that the forex market is overweighted for both portfolio allocations and hedging strategies.) Moreover, this conclusion holds for all countries in all three models.

Asymmetric volatility connectedness on the forex market

“…A similar conclusion is found by Do et al (2015), who also emphasize that it is important to account for the volatility spillover information transmission especially during turbulent periods. Further, significant directional spillovers are identified between the forex and stock markets in several studies targeting developed and emerging markets (Do et al, 2016;Andreou et al, 2013;Kumar, 2013;Kanas, 2001) or specific countries or regions including the U.S. (Ito and Yamada, 2015), Japan (Jayasinghe and Tsui, 2008), China (Zhao, 2010), the Middle East, and North Africa (Arfaoui and Ben Rejeb, 2015).…”

The role of agency theory in the relationship between foreign ownership and performance-risk of stock in Indonesia: is one or two-way interaction?

“…According to Shleifer and Vishmy (1986) regarding the agency theory that the ownership structure quite influences the risk, the shareholders have a strong incentive and power to influence the company decision toward the risk because it would be equal with the diversification action. The hedging (value protecting) can solve the risk like currency risk (Arfaoui and Rejeb, 2015). Therefore, foreign ownership has a negative impact on the risk of the stock, we composed the hypothesis as follows:…”

Asymmetric Volatility Connectedness on Forex Markets

“…A similar conclusion is found by Do et al (2015), who also emphasize that it is important to account for the volatility spillover information transmission especially during the turbulent periods. Further, significant directional spillovers are identified between the forex and stock markets in several studies targeting developed and emerging markets (Do et al, 2016;Andreou et al, 2013;Kumar, 2013;Kanas, 2001) or specific countries or regions including the U.S. (Ito and Yamada, 2015), Japan (Jayasinghe and Tsui, 2008), China (Zhao, 2010), the Middle East, and North Africa (Arfaoui and Ben Rejeb, 2015).…”