Virtual Spider Threads Interconnecting Globally:
From ‘Soft Power’ to MENA Stock Market Volatility

Abstract

This article investigates the dynamic of the volatilities and the conditional correlations among the four world stock markets of the U.K., France, Germany, the U.S. and eight Middle East and North African (MENA) stock markets from Jordan, Bahrain, Egypt, Morocco, Muscat, UAE, Saudi Arabia, and Tunisia. Using the GARCH, TGARCH models that account for asynchronous data, conditional heteroskedasticity, asymmetric volatility responses, and the joint dynamics of each country’s index with the world-market returns. Our results show that shocks originating in world-market conflicts and the associated uncertainty have increased the volatility of MENA equity markets. Secondly, regardless of its impact on volatility spillover transmission, there is little evidence to suggest that MENA markets have become more integrated with world markets since the financial crisis. Finally, these results are robust to model specification and consistent with the notion that uncertainty contributes to financial volatility spillover. It is worth mentioning that the findings from this article will have a significant implication for investors, managers, market regulators, decision makers, and scholars interested in the equity markets of MENA region in particular and other developing nations in general.

TOPICS: Developed, statistical methods, risk management, performance measurement