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Stock Market Turmoil: Worldwide Effects of Middle East Conflicts

  • Viviana Fernandez

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

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  1. 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.
  2. 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.
  3. 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.
  4. 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.
  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. 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.
  7. Connor Jeff & Rossiter Rosemary, 2005. "Wavelet Transforms and Commodity Prices," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 9(1), pages 1-22, March.
  8. Ramsey, J.B., 2002. "Wavelets in Economics and Finance: Past and Future," Working Papers 02-02, C.V. Starr Center for Applied Economics, New York University.
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