Financial integration in the MENA region

This thesis examines the financial integration in the Middle East and North Africa (MENA) countries: Bahrain, Egypt, Jordan, Kuwait, Lebanon, Morocco, Oman, Qatar, Saudi Arabia, Tunisia and the United Arab Emirates (UAE), and their interrelationship with two major developed markets: the United States of America (US) and the United Kingdom (UK) markets. To distinguish it from the existing literature related to financial integration in the MENA region, this thesis focuses on the change in financial integration in MENA countries during and after the recent global financial crisis (GFC). The thesis starts by highlighting the impact of the GFC on the MENA region as well as main policy responses. Using various econometric techniques, the thesis then investigates the cointegration among stock markets in the MENA region, and between MENA and developed markets in the pre- and post-crisis sub-periods. The thesis also develops a time-varying measure of international financial integration of the stock market indices in MENA countries, in pre- and post-crisis periods, based on the international asset pricing model with regime switching mechanism. The thesis goes further and investigates whether internal and external shocks have caused structural changes in financial markets in the region, including stock markets, foreign exchange markets and money markets. Finally, the thesis uses the autoregressive distributed lag (ARDL) model to empirically examine the long-run association among stock markets, foreign exchange markets and money markets, respectively, in the region. The empirical results indicate that the stock markets in the region became more integrated in both regional and international contexts during and post-crisis compared to the pre-crisis period. Moreover, stock markets in the region exhibit time-varying integration with the world capital market and, in general, these markets were more integrated with the world capital market during and after the GFC. The findings also suggest that the GFC has been the most significant cause of structural change in financial markets of the MENA region in the past fifteen years, along with domestic events such as financial liberalisation and/or political instability. Finally, the thesis finds that stock markets, foreign exchange markets and money markets in the region are bounded in long-run cointegration relationships. The empirical findings of this study have important implications. First, given the significant impact of the GFC, policy makers in the region need to investigate and anticipate the major channels through which a future regional crisis may affect their economies, and to undertake further steps toward the enforcement of more diversified economies and resilient financial systems. Second, because the financial integration of stock markets in the region, and between MENA and developed countries, substantially increased after the GFC, the diversification benefits from investing in these markets may be limited in the long run. Moreover, financial markets in the MENA region offer less opportunity to reduce risk by portfolio diversification because they are sensitive to global capital market shocks. This thesis contributes to the existing literature in several important ways. First, to our knowledge, this thesis is the first empirical study to explore the exact alteration in the long-run relationship among stock market in the MENA region in the post-crisis compared to the pre-crisis period. Second, this thesis develops a time-varying integration index for MENA stock markets in the crisis and post-crisis periods, providing an insight into the changing degree of integration of stock markets in the region in the global context. Finally, this study extends the existing literature by examining the financial integration among foreign exchange markets, and among money markets in the MENA region, and between MENA and developed markets, and provides a comprehensive overview of how financial systems in the region are related to each other