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Stock Market Turmoil: Worldwide Effects of Middle East Conflicts

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  • Viviana Fernandez

Abstract

This paper analyzes the effect of recent political conflicts in the Middle East on stock markets worldwide. In particular, it studies how political instability—mainly due to the war in Iraq—has affected the long-term volatility of stock markets, using two approaches, Inclan and Tiao's (1994) iterative cumulative sum of squares algorithm and wavelet-based variance analysis, to detect structural breakpoints in volatility. Controlling for conditional heteroskedasticity and serial correlation in returns, the paper finds that the ongoing Middle East conflicts have had an effect primarily on the stock markets of countries in the Middle East and in emerging Asian countries (e.g., Turkey, Morocco, Egypt, Pakistan, and Indonesia). Further evidence from an international version of the capital asset pricing mechanism shows that political instability in the Middle East has had a heterogeneous effect on the sensitivity of stock returns to market and currency risks.

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Bibliographic Info

Article provided by M.E. Sharpe, Inc. in its journal Emerging Markets Finance and Trade.

Volume (Year): 43 (2007)
Issue (Month): 3 (June)
Pages: 58-102

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Handle: RePEc:mes:emfitr:v:43:y:2007:i:3:p:58-102

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Web page: http://mesharpe.metapress.com/link.asp?target=journal&id=111024

Related research

Keywords: ICAPM; ICSS algorithm; volatility breakpoints; wavelets;

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  1. Gençay, Ramazan & Selçuk, Faruk & Whitcher, Brandon, 2001. "Differentiating intraday seasonalities through wavelet multi-scaling," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 289(3), pages 543-556.
  2. Connor Jeff & Rossiter Rosemary, 2005. "Wavelet Transforms and Commodity Prices," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 9(1), pages 1-22, March.
  3. Ser-Huang Poon & Clive W.J. Granger, 2003. "Forecasting Volatility in Financial Markets: A Review," Journal of Economic Literature, American Economic Association, vol. 41(2), pages 478-539, June.
  4. Lin Shinn-Juh & Stevenson Maxwell, 2001. "Wavelet Analysis of the Cost-of-Carry Model," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 5(1), pages 1-17, April.
  5. Ramsey James B., 2002. "Wavelets in Economics and Finance: Past and Future," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 6(3), pages 1-29, November.
  6. Aggarwal, Reena & Inclan, Carla & Leal, Ricardo, 1999. "Volatility in Emerging Stock Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(01), pages 33-55, March.
  7. Lamoureux, Christopher G & Lastrapes, William D, 1990. "Persistence in Variance, Structural Change, and the GARCH Model," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(2), pages 225-34, April.
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Cited by:
  1. Jean-Pascal Bassino & Thomas Lagoarde-Segot, 2013. "Trading patterns at the Tokyo Stock Exchange, 1931-1940," CEH Discussion Papers 012, Centre for Economic History, Research School of Economics, Australian National University.
  2. Lau, Chi Keung Marco & Demir, Ender & Bilgin, Mehmet Huseyin, 2013. "Experience-based corporate corruption and stock market volatility: Evidence from emerging markets," Emerging Markets Review, Elsevier, vol. 17(C), pages 1-13.
  3. Viviana Fernández, 2007. "The behavior of stock returns in the Asia-Pacific mining industry following the Iraq war," Documentos de Trabajo 243, Centro de Economía Aplicada, Universidad de Chile.
  4. Morales, Lucía & Gassie, Esmeralda, 2011. "Structural breaks and financial volatility: Lessons from BRIC countries," IAMO Forum 2011: Will the "BRICs Decade" Continue? – Prospects for Trade and Growth 13, Leib­niz Institute of Agricultural Development in Central and Eastern Europe (IAMO).
  5. Efe Çağlar Çağli & Pinar Evrim Mandaci & Pinar Hakan Kahyaoğlu, 2011. "Volatility Shifts and Persistence in Variance: Evidence from the Sector Indices of Istanbul Stock Exchange," International Journal of Economic Sciences and Applied Research (IJESAR), Technological Educational Institute (TEI) of Kavala, Greece, vol. 4(3), pages 119-140, December.

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