Ohannes George Paskelian

Abstract: This paper examines the characteristics and behavior of stock market equity indices of several Middle East and North Africa (MENA) countries. It also explores the cointegrating behavior of the MENA stock markets with the United States equity markets. Granger causality tests based on the VECM reveal strong bidirectional causalities between several of the MENA stock markets. The Granger causalities also indicate that stock market returns of Egypt, Jordan, Kuwait, Malta, Oman, Qatar, Saudi Arabia and Tunisia exhibit cointegrating behavior.The results reveal significant weak exogeneity from the United States stock markets to all the MENA stock markets. The findings suggest that while MENA stock markets tend to co-move with the U.S. stock market. Furthermore, markets within the MENA region are not yet fully integrated with the U.S. However, market imperfections may preclude U.S. investors from entering MENA markets to take advantage of possible diversification benefits. The increased level of integration of markets within the MENA region does not necessarily reduce the potential of risk diversification for international portfolios.(ProQuest: ... denotes formulae omitted.)IntroductionOver the last two decades, the Middle East and North Africa stock markets (MENA) have been regarded as one of the most promising investment opportunities in the world. This emerging market area provides significant portfolio diversification opportunities for investors. Financial liberalization has been implemented in a majority of MENA countries through structural adjustment programs and large-scale privatization. These programs helped to promote significant expansion of opportunities for worldwide investors. In addition, a large number of MENA nations adopted macroeconomic stabilization policies that are designed to ensure economic stability, low inflation, and reduced budget deficits. These policies help to attract and retain global investors. The confluence of liberalization reforms, oil revenue increases, excess liquidity, and petrodollar spillovers to adjoining countries has significantly increased market capitalizations, turnovers, IPOs and returns (Hammoudeh and Alesia, 2004). The region reflects growing stock market price movement interdependence. For example, the 2006 Dubai stock market collapse affected prices in varying degrees in Saudi Arabia, Oman, and Egypt (Hammoudeh and Alesia, 2004). Evidence of market integration within the MENA region would have practical importance to those who wish to invest in the region. If the markets within the MENA region tend to move together, an investor would be able to achieve his or her desired risk/return relationship by investing in any of the markets within the region.The financial integration of the world's major stock markets has been extensively studied in the empirical financial economics literature (see for example, Kaminsky and Schmukler, 2002; Bekaert and Harvey, 2000 and Kim and Singal, 2000). Emerging markets have been emphasized in the literature because they present new opportunities for portfolio and money managers to maximize the return of their portfolios. Bekaert and Harvey (1997) find that stock market returns in emerging markets were high and predictable, but lacked strong correlation with U.S. or European markets. As emerging markets mature and integrate with the world markets, they become more sensitive to the volatility of stock markets elsewhere. Emerging market integration with world markets will decrease their ability to enhance and diversify international portfolios (Neaime, 2002).Previous research focusing on the integration of stock markets in MENA nations with those in the rest of the world is limited. Neaime (2002) using the Engle-Granger (1987) cointegration approach, test for the integration of MENA markets with world stock markets over the period 1990 to 2000. He finds a weak integration among the MENA markets (Morocco, Egypt, Jordan and Turkey) and strong integration between MENA markets and developed markets (U. …

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