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Mean-Reversion Across MENA Stock Markets: Implications for Portfolio Allocations

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  • Sam Hakim

    (Pepperdine University)

  • Simon Neaime

Abstract

Are stock market returns mean-reverting in the region? Mean reversion in a stock market suggests that bad returns are likely to be followed by periods of good returns. By contrast, in a random walk setting, the future is a flip of a coin, regardless of the return outcomes in earlier periods. An important implication to our findings is that because MENA stock returns exhibit mean reversion, the volatility of returns would be lower than that implied by a random walk model. Using recent stock market data between 1995 and 2000 on Egypt, Jordan, Morocco, and Turkey we find evidence of mean reversion and introduce a non-parametric model to estimate the reverting mean and speed of reversion. Monte Carlo simulations demonstrate how the volatility of stock returns is dampened by a high speed of reversion. Our results have an important bearing on the pricing of equity derivatives in MENA and are useful for investors employing tactical asset allocation strategies.

Suggested Citation

  • Sam Hakim & Simon Neaime, 2000. "Mean-Reversion Across MENA Stock Markets: Implications for Portfolio Allocations," Working Papers 2026, Economic Research Forum, revised 09 2000.
    • Handle: RePEc:erg:wpaper:2026
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    References listed on IDEAS

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    1. Ronald Balvers & Yangru Wu & Erik Gilliland, 2000. "Mean Reversion across National Stock Markets and Parametric Contrarian Investment Strategies," Journal of Finance, American Finance Association, vol. 55(2), pages 745-772, April.
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    Cited by:

    1. Neaime, Simon, 2015. "Are emerging MENA stock markets mean reverting? A Monte Carlo simulation," Finance Research Letters, Elsevier, vol. 13(C), pages 74-80.
    2. Thomas LAGOARDE-SEGOT & Brian M. LUCEY, 2001. "Long run Equity Market Linkages in the Middle East and North Africa: in Search for Diversification Benefits," Middle East and North Africa 330400040, EcoMod.
    3. Marco GALLEGATI, 2001. "A Wavelet Analysis of MENA stock markets," Middle East and North Africa 330400031, EcoMod.

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