On the Evolution of Inter-And Intraregional Linkages to Middle East and North African Capital Markets
Girard, Eric, Ferreira, Eurico J., Quarterly Journal of Business and Economics
Middle East and North African region (MENA) countries are rarely referred to as influential countries in the global financial scene. Wars, political turmoil, economic instability, and institutional underdevelopment have traditionally been powerful obstacles to an increased access to MENA capital markets. But whereas MENA countries have yet to emerge as economic powers, their very small capital markets (1) have recently witnessed significant economic and financial development geared toward an increase in openness to foreign investors. During the 1990s, the accessibility to MENA capital markets has increased. For instance, Egypt, Israel, Jordan, Lebanon, Morocco, Tunisia, and Turkey have been progressively lifting foreign investors" ownership and capital and dividends repatriation restrictions. Even the traditionally closed Gulf Country Council markets have become more accessible to foreign investors through international funds and trusts.
An important question examined in this paper is whether MENA capital markets should be treated as a block in a globally diversified portfolio. The proximity of the countries in the region may lead one to conclude that there is a close connection between their economies and, hence, susceptibility to shocks from neighboring countries. Studies such as Abraham, Seyyed, and Al-Elg (2001), Darrat, Elkhal, and Hakim (2000), and Omran and Gunduz (2001) show that no cross-linkages between MENA capital markets exist and, hence, there is no reason to treat such markets as a block in a mean-variance maximization objective function.
Most MENA markets also do not fit in the mold of emerging markets such as Asian, Latin American, and East European capital markets, which are characterized by high returns and volatility, low correlation with the world market, and volatility clustering (Harvey, 1995a, 1995b, 1995c). Erb, Harvey, and Viskanta (1996), for instance, find that Jordan has typically low return and volatility as compared to industrialized markets and other emerging markets. In addition, emerging markets from the Asian, Latin American, and East European blocks have experienced at least one international contagious financial crisis, such as the Tequila crisis, the Asian flu, or the Russian virus. There is no similar evidence in the literature for the MENA capital markets.
MENA countries have been subjected to multiple political and economic shocks. If those disturbances are local, though, the correlation between equity markets in the region may be low. An argument for international diversification exists in that each MENA capital market can be considered as a stand-alone asset class in a globally diversified portfolio. Abraham, Seyyed, and Al-Elg (2001), in an overview of the stock markets in Bahrain, Kuwait, and Saudi Arabia, conclude that the three markets are suitable for international diversification purposes and also can be used to hedge against oil price fluctuations. They use monthly index returns from 1993 to 1998 and observe low or negative correlations between markets. The authors argue that their findings underline the potential MENA capital markets offer for risk reduction. Omran and Gunduz (2001) use a multivariate cointegration methodology and find no long-term stochastic trends between Jordan, Turkey, Egypt, Israel, and Morocco from January 1996 to June 1999 and also conclude that MENA capital markets offer diversification incentive to the global investor. Darrat, Elkhal, and Hakim (2000) find long-term bivariate cointegrative relationships for Morocco-Egypt and Morocco-Jordan, but no multivariate cointegrative relationships between the three capital markets from October 1996 to August 1999. They conclude that the three markets, as a block, offer diversification potentials for the global investor.
Previous studies have only used small samples of few MENA capital markets to conclude on the inexistence of intraregional long-term price linkages. …