The COVID-19 Outbreak and Risk–Return Spillovers between Main and SME Stock Markets in the MENA Region

Nassar S. Al-Nassar and Beljid Makram
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Nassar S. Al-Nassar: Department of Economics and Finance, College of Business and Economics, Qassim University, Buraydah 52571, Saudi Arabia
Beljid Makram: Department of Economics and Finance, College of Business and Economics, Qassim University, Buraydah 52571, Saudi Arabia

IJFS, 2022, vol. 10, issue 1, 1-28

Abstract: This study investigates return and asymmetric volatility spillovers and dynamic correlations between the main and small and medium-sized enterprise (SME) stock markets in Saudi Arabia and Egypt for the periods before and during the COVID-19 pandemic. Return and volatility spillovers are modelled using a VAR-asymmetric BEKK–GARCH (1,1) model, while a VAR-asymmetric DCC–GARCH (1,1) model is employed to model the dynamic conditional correlations between these markets, which are then used to determine and explore portfolio design and hedging implications. The results show that while bidirectional return spillovers between the main and SME stock markets are limited to Saudi Arabia, shock and volatility spillovers have different characteristics and dynamics in both main–SME market pairs. In addition, the dynamic correlations between the main and SME markets are mostly positive and have notably increased during the COVID-19 pandemic, particularly in Saudi Arabia, suggesting that adding SME stocks to a main stock portfolio enhances its risk-adjusted return, especially during tranquil market phases. One practical implication of our results is that the development of SME stock markets can indirectly contribute to economic development via the main market channel and provide an avenue for portfolio diversification and risk management.

Keywords: MENA region; SME stock market; return and volatility spillovers; hedge ratios; optimal portfolio designs (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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