The Dynamic Behaviour and Determinants of Linkages among Middle Eastern and North African Stock Markets

The purpose of this paper is to study the time-varying conditional correlation across 12 MENA stock markets over the period July 2005 to January 2013, while taking into account the impact of two downturn periods. Methodologically, we use a multivariate framework which allows for both return asymmetry and leptokurtic distribution. The empirical results demonstrate that both the Israeli-Hezbollah war of 2006 and the financial crisis of 2008 generate substantial similarities in return linkage patterns among MENA stock markets. Most importantly, the results imply that there are still potential benefits for portfolio diversification, even in downturn periods when they are the most needed. Also, we find that conditional correlation depends on levels of stock market liquidity and financial development.