The contribution of Euro-Mediterranean Partnership to regional integration

The paper investigates whether Southern Mediterranean and Middle Eastern markets under the Euro-Mediterranean Partnership (Egypt, Lebanon, Morocco, Malta, and Turkey) have become more financially integrated with the European stock market over time. The findings suggest that the Turkish equity market is moderately integrated with the European market, while the other economies exhibit weak financial integration with Europe, supporting the idea that the partnership appears to have no effect on enhancing inter-market linkages for these economies. Therefore, these markets would be good destinations for international investors seeking attractive investment opportunities to diversify their equity portfolios. Structural changes in the cross-market integration are found, which may be considered as a guide for international equity portfolio diversification over different subperiods. In addition, there is evidence of an increasing trend in conditional correlations for Egypt and Turkey, to varying degrees, over time, notably during the post global financial crisis of 2007-2008, thus revealing herding behavior during this period. Overall, investors should be wary of the variation of equity market integration over time before engaging in an investment at the level of portfolio management and diversification, and policymakers must be aware of the remoteness of the current achievements of the Euro-Mediterranean Partnership from the targets set in terms of financial development and economic growth.