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Political uncertainty and stock market volatility in the Middle East and North African (MENA) countries

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  • Chau, Frankie
  • Deesomsak, Rataporn
  • Wang, Jun

Abstract

This paper examines the impact of political uncertainty (caused by the civil uprisings in the Arab World i.e., “Arab Spring”) on the volatility of major stock markets in the MENA region. Our main findings are as follows. First, by distinguishing between conventional and Islamic stock market indices, we find that these two groups of investments react heterogeneously to the recent political turmoil. Specifically, we document a significant increase in the volatility of Islamic indices during the period of political unrests whereas the uprisings have had little or no significant effect on the volatility in conventional markets. Such difference is confirmed by further analysis in a multivariate GARCH model. Second, regardless of its impact on volatility, there is little evidence to suggest that MENA markets have become more integrated with international markets after the political revolution. Third, similar results are not found for the benchmark indices which indicate that the changes are the result of political tensions. In general, these results are robust to model specification and consistent with the notion that political uncertainty contributes to financial volatility. Overall, the findings are important in understanding the role of political uncertainty on stock market stability and are of great significance to investors and market regulators.

Suggested Citation

  • Chau, Frankie & Deesomsak, Rataporn & Wang, Jun, 2014. "Political uncertainty and stock market volatility in the Middle East and North African (MENA) countries," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 28(C), pages 1-19.
  • Handle: RePEc:eee:intfin:v:28:y:2014:i:c:p:1-19
    DOI: 10.1016/j.intfin.2013.10.008
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    Cited by:

    1. Ansgar Belke & Daniel Kronen, 2017. "The impact of uncertainty on macro variables - An SVAR-based empirical analysis for EU countries," ROME Working Papers 201711, ROME Network.
    2. Syed Abul, Basher & Salem, Nechi & Hui, Zhu, 2014. "Dependence patterns across Gulf Arab stock markets: a copula approach," MPRA Paper 56566, University Library of Munich, Germany.
    3. Saban Nazlioglu & Shawkat Hammoudeh & Rangan Gupta, 2015. "Volatility transmission between Islamic and conventional equity markets: evidence from causality-in-variance test," Applied Economics, Taylor & Francis Journals, vol. 47(46), pages 4996-5011, October.
    4. Juneja, Januj A., 2016. "Financial crises and estimation bias in international bond markets," Research in International Business and Finance, Elsevier, vol. 38(C), pages 593-607.
    5. repec:eee:finsta:v:30:y:2017:i:c:p:79-91 is not listed on IDEAS
    6. Alam, Nafis & Arshad, Shaista & Rizvi, Syed Aun R., 2016. "Do Islamic stock indices perform better than conventional counterparts? An empirical investigation of sectoral efficiency," Review of Financial Economics, Elsevier, vol. 31(C), pages 108-114.
    7. Al Shugaa, Ameen & Masih, Mansur, 2014. "Uncertainty and Volatility in MENA Stock Markets During the Arab Spring," MPRA Paper 58867, University Library of Munich, Germany.
    8. Tammuz Alraheb & Amine Tarazi, 2016. "Local Versus International Crises, Foreign Subsidiaries and Bank Stability: Evidence from the MENA Region," Working Papers 1045, Economic Research Forum, revised 09 Jan 2016.
    9. Balcılar, Mehmet & Demirer, Rıza & Hammoudeh, Shawkat, 2015. "Regional and global spillovers and diversification opportunities in the GCC equity sectors," Emerging Markets Review, Elsevier, vol. 24(C), pages 160-187.
    10. repec:eee:quaeco:v:67:y:2018:i:c:p:14-27 is not listed on IDEAS
    11. repec:eee:quaeco:v:67:y:2018:i:c:p:149-161 is not listed on IDEAS
    12. Mnasri, Ayman & Nechi, Salem, 2016. "Impact of terrorist attacks on stock market volatility in emerging markets," Emerging Markets Review, Elsevier, vol. 28(C), pages 184-202.
    13. Rahim, Adam Mohamed & Masih, Mansur, 2014. "Effects of Political Turmoil (Arab Spring) on Portfolio Diversification Benefits: Perspectives of the Moroccan Islamic Stock investors," MPRA Paper 58832, University Library of Munich, Germany.
    14. repec:rss:jnljef:v2i2p5 is not listed on IDEAS
    15. Ghosh, Saibal, 2016. "Political transition and bank performance: How important was the Arab Spring?," Journal of Comparative Economics, Elsevier, vol. 44(2), pages 372-382.
    16. Ben Rejeb, Aymen, 2016. "Volatility Spillover between Islamic and conventional stock markets: evidence from Quantile Regression analysis," MPRA Paper 73302, University Library of Munich, Germany.
    17. Buriev, Abdul Aziz & Masih, Mansur, 2015. "Impact of Arab uprising on Portfolio diversification benefits at different investment horizons for the Turkish investors in relation to the regional stock markets: Multivariate GARCH-DCC and Wavelet c," MPRA Paper 65233, University Library of Munich, Germany.
    18. Bouri, Elie, 2015. "Oil volatility shocks and the stock markets of oil-importing MENA economies: A tale from the financial crisis," Energy Economics, Elsevier, vol. 51(C), pages 590-598.
    19. Ahmed, Walid M.A., 2017. "The impact of foreign equity flows on market volatility during politically tranquil and turbulent times: The Egyptian experience," Research in International Business and Finance, Elsevier, vol. 40(C), pages 61-77.
    20. Hammoudeh, Shawkat & Mensi, Walid & Reboredo, Juan Carlos & Nguyen, Duc Khuong, 2014. "Dynamic dependence of the global Islamic equity index with global conventional equity market indices and risk factors," Pacific-Basin Finance Journal, Elsevier, vol. 30(C), pages 189-206.
    21. Bouri, Elie & Awartani, Basel & Maghyereh, Aktham, 2016. "Crude oil prices and sectoral stock returns in Jordan around the Arab uprisings of 2010," Energy Economics, Elsevier, vol. 56(C), pages 205-214.
    22. repec:eee:finana:v:52:y:2017:i:c:p:172-189 is not listed on IDEAS
    23. repec:eee:quaeco:v:68:y:2018:i:c:p:118-131 is not listed on IDEAS

    More about this item

    Keywords

    Arab spring; Political uncertainty; Stock market volatility; MENA countries;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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