Academic journal article The Journal of Developing Areas

The Impact of Mena Conflicts (the Arab Spring) on Global Financial Markets

Academic journal article The Journal of Developing Areas

The Impact of Mena Conflicts (the Arab Spring) on Global Financial Markets

Article excerpt

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

Political conflicts occur in different regions of the world and the empirical finance literature has paid some though limited attention to the effect of geopolitical events on asset market behavior. It would not be an overstatement that one of the most critical areas in the world is the Middle East and North Africa (MENA). In this region are located the essential and primary sources of energy reserves in the world (developed and developing) and of course the region has an unusually high concentration of the major purchasers of commercial and military equipment from developed countries. The political and economic news of this region are likely to be highly influential on the global economy. Political conflicts in this region will have an impact not only on the financial markets of the MENA countries but also on global financial markets.

MENA countries have been experiencing rare political conflicts collectively referred to as "The Arab Spring" - a revolutionary wave of protests, uprisings and demonstrations that have been taking place in the Arab world since December 2010. Even though it is clear that the popular unrests are born of a desire for more social, political and economic freedom, the time of uprisings came as a surprise for everyone. Although the main causes of these uprisings are political, their economic roots are unavoidably interlinked. Until now, the revolutions in Tunisia and Egypt resulted in departure of their leaders while a civil war in Libya resulted in Gaddafi's death and changes in government. There have also been demonstrations and uprisings in Syria, Bahrain, Yemen and minor protests in Algeria, Iraq, Jordan, Morocco, Oman, Kuwait, Lebanon, Mauritania, Saudi Arabia, and Sudan. It could be argued that there is potential for similar unrest in other important countries in MENA.

These events provide a convenient natural experimental setting for estimating the impact of unexpected and shock news of conflicts on the volatility of international financial markets and the impact of potential unrests (in other countries in this region) on international financial markets. This study contributes to the literature on the reaction of financial markets to political conflicts by providing evidence on market reactions to the news about the unexpected recent conflicts in MENA (see e.g. Ito and Lee 2005, Nikkinen et al. 2008).

We consider commodity markets (oil and gold) in addition to stock markets, which have been the most commonly examined by previous studies (see e.g. Nikkinen et al. 2008, Schwert 1990, Schwert 1989). Gold and oil markets are affected by war and uprisings. This is because gold is considered as a safe investment in the case of conflicts and oil prices are highly sensitive to unrests in oil-supplying countries. We could argue that some exchanges would be safer for investors due to these conflicts. The main objective of this research is to evaluate the short-term reaction of the major stock markets to the recent MENA conflicts. The study analyses not only the reactions of the MENA markets to the conflicts but assesses the stock market reactions of developed, developing, Asian, European and Latin American regions to these conflicts. Extending the scope of the study across various global regions and focusing on different groups of markets allow us to investigate whether the impacts of such political shocks are limited only to those 'well integrated' markets or whether their impacts are spilling over into various other regions.

Nikkinen et al. (2008) reports, for example, that the September 11 attacks in New York, USA, had only a minor effect on MENA financial markets as compared to its impact on the rest of the world. We, therefore, seek to investigate whether the effect of the recent MENA unrests displays a contagion effect towards other regions, especially developed countries.

We consider four main political conflicts in the MENA region: the Tunisian revolution which ended with the departure of the President of Tunisia, Ben Ali, on 14 January 2011, the Egyptian unrests that resulted in the departure of the President of Egypt, Mubarak on 11 February 2011, the intervention of coalition forces with NATO support in the Libyan civil war, specifically, the coalition's attack on 19 March 2011 and the Yemeni uprisings that caused Ali-Abdullah Saleh to leave the country on 5 June 2011. …

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