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Correlation and Volatility of the MENA Equity Markets in Turbulent Periods, and Portfolio Implications

Elie Bouri ()

Economics Bulletin, 2013, vol. 33, issue 2, 1575-1593

Abstract: This paper examines the conditional volatility and return linkages for the equity markets of Morocco, Tunisia, Egypt, Israel, Lebanon, Jordan, Kuwait, Bahrain, Qatar, UAE, Saudi Arabia, and Oman over the period 2005-2012. To this end, we employ a multivariate model with time varying conditional variances and correlations and with leptokurtic distribution which allows for both return asymmetry and fat tails. Particularly, we investigate the pre- and post-stress periods using the Israeli-Hezbollah war in July 2006 and the global financial crisis of 2008 as dating points for detecting the time varying variance and correlation behaviours across the twelve equity markets. We find strong evidence that a downward trend in return correlations estimates across a number of MENA equity markets is driven equally by both the war and the global financial crisis, implying that there still appear to be benefits from regional portfolio diversification even in stress periods when they are most necessary. Finally, we use the estimated results to compute the optimal weights in order to make the best portfolio allocations.

Keywords: Conditional correlation; conditional volatility; MENA equity markets; stress periods; portfolio diversification (search for similar items in EconPapers)
JEL-codes: F3 G1 (search for similar items in EconPapers)
Date: 2013-06-24
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