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An empirical investigation of stock market behavior in the Middle East and North Africa

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  • Cheng, Ai-Ru
  • Jahan-Parvar, Mohammad R.
  • Rothman, Philip

Abstract

This paper analyzes excess market returns in the relatively understudied financial markets of nine Middle Eastern and North African (MENA) countries within the context of three variants of the Capital Asset Pricing Model: the static international CAPM; the constant-parameter intertemporal CAPM; and a Markov-switching intertemporal CAPM which allows for the degree of integration with international equity markets to be time-varying. On the whole we find that: (1) Israel and Turkey are most strongly integrated with world financial markets; (2) in most other MENA markets examined there is primarily local pricing of risk and evidence of a positive risk-return trade-off; and (3) there is substantial time variation in the weights on local and global pricing of risk for all of these markets. Our results suggest that investment in many of these markets over the sample studied would have provided returns uncorrelated with global markets, and thus would have served as financial instruments with which portfolio diversification could have been improved.

Suggested Citation

  • Cheng, Ai-Ru & Jahan-Parvar, Mohammad R. & Rothman, Philip, 2010. "An empirical investigation of stock market behavior in the Middle East and North Africa," Journal of Empirical Finance, Elsevier, vol. 17(3), pages 413-427, June.
    • Handle: RePEc:eee:empfin:v:17:y:2010:i:3:p:413-427
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    More about this item

    Keywords

    CAPM Integrated Segmented MENA Markov-switching;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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