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Journal of Economic Integration 2012 March;27(1) :134-166.
Testing for “Contagion” of the Subprime Crisis on the Middle East and North African Stock Markets: A Markov Switching EGARCH Approach
Wajih Khallouli and 
René Sandretto 
Ecole Supérieure des Sciences Economiques et Commerciales de Tunis–, University of Tunis, 4 rue Abou Zakaria El Hafsi, 1089 MONTFLEURY (Tunisia), Tel: 216 71 330 266, Fax: 216 71 333 518, E-mail:
GATE Lyon St Etienne (Groupe d'Analyse et de Theorie Economique) CNRS, University of Lyon, 93 chemin des Mouilles BP 167. 69131 ECULLY (France), Tel: 33 (0)4 72 86 61 12, Fax: 33 (0)4 72 86 60 90, E-mail:
Copyright ©2012 Journal of Economic Integration

In this paper, we investigate whether the recent financial turmoil which arose in the United States has contaminated the Middle East and North African countries (MENA). In contrast to Lagoard-Segot and Lucey (2009), we try to identify the existence of pure contagion (Masson, 1999) rather than shift-contagion (Rigobon, 2003). Then, we explicitly define financial “contagion” in accordance with Eichengreen et al. (1996) and we extend the Cerra and Saxena (2002) methodology by using a Markov-Switching EGARCH model introduced by Henry (2009) in order to identify contaminated MENA stock markets. Our results provide evidence of a persistence of recession characterised by low mean/high variance regimes which coincides with the third phase of the subprime crisis. In addition, there is evidence of mean and volatility contagion in MENA stock markets caused by the US stock market.

JEL Classification: C32, F31, G01, G15

Keywords: Subprime Crisis | Contagion | MENA Stock Markets | Markov Switching EGARCH Model
1. Abiad A. (2003), “Early Warning Systems: A Survey and a Regime-Switching Approach”. IMF Working Paper, WP/03/32.
2. Alper C.E. and Yilmaz K. (2004), “Volatility and contagion: evidence from the Istanbul stock exchange”, Economic Systems, 28(4), pp. 353-367.
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