The stock market responses of MENA countries to major global shocks

This thesis investigates whether the Middle East and North Africa (MENA) stock markets are susceptible to various global shocks, in particular of financial and geopolitical crises. The purpose of this research is to improve our understanding of the effect and consequences of turbulent global events on the MENA equity markets. The recent attempts of emerging markets, including the MENA equity markets to integrate have profound implications for asset pricing, diversification opportunities, and susceptibility to future global market turbulence and geopolitical unrest. Existing studies on MENA equity markets are characterized by a limited number of countries under examination; this thesis in contrast examines eleven equity markets from the MENA region. Furthermore, the majority of studies have failed to examine the country risk over time and their exposure to external shocks. This failure may stem from the fact that these markets are completely segmented and, therefore, considered safe haven for international investors. This raises a question of why the empirical literature does not provide comprehensive results to justify this supposed immunity. To solve this problem, this thesis employs several econometric models such as the Kalman filter, the Bai and Perron (2003) model, and the Johansen cointegration model, in addition to panel regression analysis. The first chapter examines the country beta instability using unconditional ICAPM. The chapter also examines the impact of the war on Iraq of 2003 using the statespace model and the Kalman filter approach. The outcomes reveal that the country betas are not stable and that the effect of the war on Iraq is limited to only four markets in the MENA region. The second chapter employs the multiple structural breakpoints model of Bai and Perron (2003). The results show that the country betas have coped with regional and global crises such as the Asian, Russian, and Turkish financial crises, and geopolitical unrest such as that brought on by the September 11, 2001 attacks. The Bai and Perron (2003) model shows that more MENA markets have experienced structural breaks due to the war on Iraq than what is found from the Kalman filter. The third chapter examines whether economic variables can explain the variation of country beta in a panel analysis. The results show that money supply and inflation have significant positive impacts on the country beta of MENA equity markets, whereas the accumulation of foreign currency reserves helps to alleviate it over time. In the fourth chapter, the thesis examines the integration of MENA equity markets with four major developed markets: Germany, Japan, UK, and USA, using the Johansen cointegration. The outcomes show that the integration of the MENA equity markets has significantly increased since the global financial crisis, indicating more market exposure to the global financial system