Register  |  Login  |  Inquiries  |  Sitemap
Advanced Search
Journal of Economic Integration 2014 March;29(1) :1-19.
DOI: https://doi.org/10.11130/jei.2014.29.1.1
Israeli-Hezbollah War and Global Financial Crisis in the Middle East and North African Equity Markets
Elie I Bouri 
Holy Spirit University of Kaslik, Jounieh, Lebanon
Corresponding Author: Elie I Bouri ,Tel: +9619600800, Fax: +96196008001, Email: eliebouri@usek.edu.lb
Copyright ©2014 Journal of Economic Integration
ABSTRACT
This paper, which relies on a dynamic conditional correlation model covering eight years of daily data for twelve equity markets in the Middle East and North Africa, examines the dynamic behaviour of equity returns and the response to international and regional stress periods. We assess whether the Israeli-Hezbollah war and the global financial crisis have accentuated equity linkages and find strong evidence that, although war and financial crisis shocks caused harmful consequences in most MENA markets, there were significant benefits of regional diversification during stress periods in some MENA markets. Low equity correlations across several markets are driven by both the war and the global financial crisis, implying that there still appear to be benefits from regional diversification, especially in the times of stress when it is most needed. Our empirical results are useful for asset managers seeking to construct portfolios that can better resist adverse market conditions.

JEL Classification
F30: General
G01: Financial Crises
Keywords: Stress Periods | Dynamic Conditional Correlation | MENA Equity Markets
 
REFERENCE
1. Abraham, A., Seyyed, F.J. and Al-Elg, A. (2001), ‘’Analysis of diversification benefits of investing in the emerging gulf equity markets’’, Managerial Finance, Vol. 27, pp. 47-57.
2. Ang, A. and Bekaert, G. (2002), “International asset allocation with regime shifts”, Review of Financial Studies, Vol. 15, pp. 1137-1187.
3. Ang, A. and J. Chen (2002) “Asymmetric correlations of equity portfolio”, Journal of Financial Economics”, Vol. 63, pp. 443-494.
4. Al-Rjoub, S. and Azzam, H. (2012), “Financial crises, stock returns and volatility in an emerging stock market: the case of Jordan”, Journal of Economic Studies, Vol. 39, pp.178-211.
5. Alsybaie, A. and Najad, M. (2009), “Trading volume, time-varying conditional volatility, and asymmetric volatility spillover in the Saudi stock market”, Journal of Multinational Financial Management, Vol. 19, pp.139-159.
6. Assaf, A. (2003), “Transmission of stock price movements: the case of GCC stock markets”, Review of Middle East Economics and Finance, Vol. 1, pp. 171-189.
7. Assaf, A. (2009), “Extreme observations and risk assessment in the equity markets of MENA region: Tail measures and Value-at-Risk”, International Review of Financial Analysis, Vol. 18, pp. 109-116.
8. Bala, L. and Premaratne, G. (2004), “Volatility spillover and co-movement: some new evidence from Singapore”, Midwest Econometrics Group (MEG) Fall Meetings North Western University Evanston.
9. Bauwens, L., Laurent, S., and Rombouts, J.V. K. (2006), “Multivariate GARCH models: a survey”, Journal of Applied Econometrics, Vol. 21, pp. 79-109.
10. Beine, M. Laurent, S. and Lecourt, C. (2000), “Accounting for conditional leptokurtosis and closing days effects in FIGARCH models of daily exchange rates”, Applied Financial Economics, Vol. 12, pp. 589-600.
11. Bekaert, G. and Harvey, C.R. (1997), “Emerging equity market volatility”, Journal of Financial Economics, Vol. 43, pp. 403-444.
12. Bekaert, G. and Wu, G. (2000), “Asymmetric volatility and risk in equity markets” Review of Financial Studies 13, pp.1-42.
13. Bollerslev, T. (1986), “Generalized autoregressive conditional heteroscedasticity”, Journal of Econometrics, Vol.31, pp. 307-327.
14. Bollerslev, T. (1990), “Modelling the coherence in short-run nominal exchange rates: a multivariate generalized ARCH approach”, Review of Economics and Statistics, Vol. 72, pp. 498-505.
15. Bollerslev, T., Engle, R.F. and Wooldridge, J.M. (1988), “A capital asset pricing model with time-varying covariance”, Journal of Political Economy, Vol. 96, pp.116-131.
16. Boudt, K. and C. Croux (2010), “Robust M-Estimation of Multivariate GARCH Models”, Journal Computational Statistics and Data Analysis, Vol. 54, pp. 2459-2469
17. Brooks, R. (2007), “Power ARCH modelling of the volatility of emerging equity markets”, Emerging Markets Review, Vol. 8, pp.124-133.
18. Caporin, M. and McAleer, M. (2009), “Do We Really Need Both BEKK and DCC? A Tale of Two Covariance Models”, Available at SSRN: http://ssrn.com/abstract=1338190.
19. Chiang, T.C., Jeon, B.N. and Li, h. (2007), “Dynamic correlation analysis of financial contagion: evidence from Asian markets”, Journal of International Money and Finance, Vol. 26, pp. 1026-1228.
20. Cho, J.H. and Parhizgari, A.M. (2008). “East Asian financial contagion under DCC-GARCH”, International Journal of Banking and Finance, Vol. 6, pp. 17-30.
21. Claessens, S., Dasgupta, S. and Glen, J. (1995), “Return behavior in emerging stock markets”, World Bank Economic Review, Vol. 9, pp.131-152.
22. Domowitz, I. Glen, J. and Madhavan, A. (1998), “International cross-listing and order flow migration: Evidence from an emerging market”, Journal of Finance, Vol. 53, pp.2001-2027.
23. El-Erian, M.A., and Kumar, M.S. (1995), “Emerging equity markets in Middle Eastern countries”, IMF Staff Paper number 42
24. Engle, R. (1982), “Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation”, Econometrica, Vol.50, pp. 987-1007.
25. Engle, R. (2002), Dynamic conditional correlation: a simple class of multivariate generalized autoregressive conditional heteroskedasticity models, Journal of Business and Economic Statistics, Vol. 20, pp. 339-350.
26. Engle, R.F. and Kroner, K. F. (1995), “Multivariate simultaneous generalized ARCH”, Econometric Theory, Vol. 11, pp. 122-150.
27. Forbes, K. J. and M. D. Chinn (2004), “A Decomposition of Global Linkages in Financial Markets over Time”, The Review of Economics and Statistics, Vol. 86, pp. 705-722.
28. Forbes, K.J. and Rigobon, R. (2002), “No contagion, only interdependence: measuring stock market comovements”, Journal of Finance, Vol. 57, pp. 2223-2261.
29. Hammoudeh, S. and Li, H. (2008), “Sudden changes in volatility in emerging markets: The case of Gulf Arab stock markets”, International Review of Financial Analysis, Vol. 17, pp.47-63.
30. Hammoudeh, S., Yuan, Y. and McAleer, M. (2009), “Shock and volatility spillovers among equity sectors of the Gulf Arab stock markets” The Quarterly Review of Economics and Finance 49, pp.829-842.
31. Harvey, C. (1995), “Predictable risk and returns in emerging markets”, Review of Financial Studies, Vol. 8, pp. 773-816.
32. Janakiramanan, S. and Lamba, A.S. (1998), “An empirical examination of linkages between Pacific-Basin stock markets”, Journal of International Financial Markets, Institutions and Money, Vol. 8, pp.155 -173.
33. Jarque, C. and Bera, A. (1980), “Efficient tests for normality, homoscedasticity and serial independence of regression residuals”, Economics Letters, Vol. 6, pp.255-259.
34. Khallouli, W. and Sandretto, R. (2012), “Testing for “Contagion” of the Subprime Crisis on the Middle East and North African Stock Markets: A Markov Switching EGARCH Approach”, Journal of economic
35. Integration, Vol. 27 No.1, pp. 134-166.
36. Khedhiri, S. and Muhammad, N. (2008), “Empirical Analysis of the UAE Stock Market Volatility”, International Research Journal of Finance and Economics, Vol. 15, pp.249-260.
37. Kring S., Rachev S. T., Hochstotter, M. and Fabozzi, F. J. (2007), “Composed and Factor Composed Multivariate GARCH Models”, University of Karlsruhe, Technical Report.
38. Kroner, K.F. and Ng, V.K. (1998), “Modeling asymmetric comovements of asset returns”, Review of Financial Studies, Vol. 11, pp.817-844.
39. Lagoarde-Segot, T. and Lucey, B. (2008), “Efficiency in emerging markets-Evidence from the MENA region”, Journal of International Financial Markets, Institutions and Money, Vol. 18, pp. 94-105.
40. Lagoarde-Segot, T. and Lucey, B. (2009), “Shift-contagion vulnerability in the MENA stock markets”, The World Economy, Vol. 32, pp. 1478-1497.
41. Lee, S.J. (2009), “Volatility spillover effects among six Asian countries” Applied Economics Letters 16, pp. 501- 508.
42. Ling, S. and McAleer, M. (2003), “Asymptotic theory for a vector ARMA-GARCH model”, Econometric Theory, Vol. 19, pp. 278-308.
43. Ljung, G. and Box, G. (1979), “On a measure of lack of fit in time series models”, Biometrika, Vol. 66, pp. 265-270.
44. Longin, F. and Solink, B. (1995), “Is correlation in international equity returns constant: 1960–1990?”, Journal of International Money and Finance, Vol. 14, pp. 3-26.
45. Longin, F. and B. Solnik (2001) “Extreme correlation of international equity markets”, Journal of Finance, Vol. 56, pp. 649-676.
46. Maghyereh, A. and AL-Kandari, A. (2007), “Oil prices and stock markets in GCC countries: new evidence from nonlinear co-integration analysis”, Managerial Finance, Vol. 33, pp. 449-460.
47. Nagayasu, J. (2013), “Asia-Pacific Stock Returns around the Lehman Shock and Beyond: time-varying conditional correlations”, Journal of Economic Integration, Vol. 28 No.3, pp. 412-440.
48. Nakhleh, H. (2007), “The 2006 Israeli war on Lebanon: Analysis and strategic implications”, Strategic Research Project, U.S. Army War College, USA.
49. Manganelli, S. (2004), “Asset Allocation by Variance Sensitivity Analysis”, Journal of Financial Econometrics, Vol. 2, pp. 370-389
50. Neaime S. (2012), “The global financial crisis, financial linkages and correlations in returns and volatilities in emerging MENA stock markets”, Emerging Markets Review, Vol. 13, pp. 268-282.
51. Ng, A. (2000), “Volatility spillover effects from Japan and the US to the Pacific-Basin”, Journal of International Money and Finance, Vol. 19, pp. 207-233.
52. Pantaleo, E., M. Tumminello, F. Lillo, and R.S. Mantegna (2010), “When do improved covariance matrix estimators enhance portfolio optimization? An empirical comparative study of nine estimators”, Quantitative Finance, Vol. 11, pp. 1067-1080.
53. Patton, A. (2000), “Modelling time-varying exchange rate dependence using the conditional copula”, University of California, San Diego, Discussion Paper 01-09.
54. Poon, S.-H., Rockinger, M. and Tawn, J. (2004), “Extreme value dependence in financial markets: diagnostics, models, and financial implications”, The Review of Financial Studies, Vol. 17, pp. 581-610.
55. Rao, A. (2008), “Analysis of volatility persistence in Middle East emerging equity markets”, Studies in Economics and Finance, Vol. 25, pp. 93-111.
56. Rossi, J.L., Ehlers, R.S. and Andrade, M.G. (2012), “Copula-GARCH Model Selection: A Bayesian Approach”, University of São Paulo, Technical Report 88.
57. Serban, M., Brockwell, A., Lehoczky, J. and Srivastava, S. (2007), “Modelling the dynamic dependence structure in multivariate financial time series”, Journal of Time Series Analysis, Vol. 28, pp. pp. 763-782.
58. Valadkhani, A. and Chancharat, S. (2008), “Dynamic linkages between Thai and international stock markets”, Journal of Economic Studies, Vol. 35, pp. 425-441.
59. Yu, Junk-Suk and Hassan, M. K. (2008), “Global and regional integration of the Middle East and North African (MENA) stock markets”, Quarterly Review of Economic and Finance, Vol. 48, pp. 482-504.
Editorial Office
Center for Economic Integration, Sejong Institution, Sejong University, 209, Neungdong-Ro, Gwangjin-Gu,
Seoul, 05006, Korea
TEL : +82-2-3408-3338    FAX : +82-2-3408-3338   E-mail : jei@sejong.ac.kr
Browse Articles |  Current Issue |  For Authors and Reviewers |  About
Copyright© by Center for Economic Integration. All right reserved.