Dynamic linkages and volatility transmission among the MENA countries` equity markets and vis-a-vis selected developed markets

Abstract

With the latest development of the liberation of capital movements, the advanced process of securitisation of stock markets, and the financial globalisation, the international equity markets have become increasingly interdependent. This situation has resulted in the limitation of diversification opportunities across international equity markets. Similarly, this situation has rendered highly integrated and interdependent equity markets exposed to financial contagion which can cause the collapse of these markets in the case of crises and bubbles. In this regard, the MENA equity markets appear to be one of the alternative avenues for international diversification due to the recent economic and political reforms implemented by most of these countries. Hence it is crucial to understand the nature of equity markets relationships between countries in the region and vis-à-vis the developed equity markets. Accordingly, the study examines the long and short run relationships, as well as the volatility transmission among the MENA equity markets, as well as between the MENA equity markets and selected developed equity markets. Furthermore, the study investigates the possible impact of the global political and economic events on the interdependence structure between the studied equity markets. The study covers the period between 29/03/2000 through 12/12/2012 in weekly form. In line with these objectives, the study applied the Johanson and Juselius (1990) cointegration test to examine the long run association between the studied equity markets, vector error correction model to outline the short run adjustments towards possible long run equilibrium, Toda and Yamamoto (1995) Granger non causality tests for the short run dynamic relationships, Multivariate BEKK GARCH to study the volatility and shocks transmission between the studied markets, and finally Bai and Perron (2003) and Lee and Strazicich (2004) to identify the structural breaks during the study period and their possible impact on the interdependence structure between the studied equity markets. The findings revealed that there is no long run association between the GCC equity markets, between the three developed equity markets, between the North African equity markets, and between the developed and North African equity markets. In the short run, the GCC equity markets are mostly influenced by changes in the remaining GCC and Levant equity markets. Similarly, the Levant equity markets are mostly influenced by changes within the region. In contrast, among the North African equity markets only the Egyptian equity market is influenced by the Palestinian and Israeli equity markets. On the other hand, the developed equity markets of Japan and UK are influenced by the US equity market, while the latter is not influenced by the two former equity markets. Finally, the existence of multiple structural breaks during the study period had significant influence on the long run relationships among the selected market. This study has significant contribution to the theory, to the policy makers and regulators, as well as to the practitioners.