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Capital Market Integration in the Middle East and North Africa and its
Implications for International Portfolio Allocation

Thomas Lagoarde-Segot and Brian M. Lucey

  • IIIS Discussion Paper No. 71 The purpose of this paper is to investigate the Middle East and North African (MENA) stock markets' potential for portfolio diversification. Using daily data ranging from 1998 to 2004, we examine the degree and the dynamics of both intra and inter-regional long run equity linkages. At the inter-regional level, the analysis is based on two co-integration analyses and on coefficients of country-weight in regional systemic risk. Results indicate no common stochastic pattern and a decreasing weight of the MENA region in European and American systemic risk, suggesting increased market segmentation. Turning to a country level analysis, we find no stable long-run relationships with the regional benchmark, but a few cointegrating vectors with the EMU (Turkey) and the US (Turkey, Jordan and Tunisia). However, the dynamics of each country's contribution to systemic risk in the different regions appear diverging. Besides, results from the moving average analysis indicate that although economic integration seems to diminish market segmentation, the MENA capital markets respond differently to exogenous financial and political shocks. Turning to intra-regional linkages, a VAR-VECM analysis shows that local markets display a high sensitivity to intraregional shocks. Taking these results together, our conclusions are (i) the MENA markets provide significant diversification opportunities, (ii) they should not be treated as a block for
    global strategic purposes, and (iii) local economic shocks might affect the value of a regional
    Keywords: Stock Market Integration, Portfolio Diversification, MENA markets, Time-varying methods.
    JEL classification: G11;G12;G15

Last updated 28 August 2014 by IIIS (Email).