Does Investors’ Fear Gauge in a Mature Market Matter? Evidence from the MENA Region

Abstract

This article examines the notion that less developed markets may be deemed safe havens for international investors. It tests the effect of mature markets’ fear on risk and return in less developed markets. The study employs multivariate VAR-GARCH methodology to test for volatility spillover between the U.S. market risk perception index (VIX) and 12 Middle East and North African (MENA) stock markets. It examines volatility spillover before, during, and after the global financial crisis to assess fear spillover during stable and turbulent periods. Results reveal that MENA stock markets’ own volatility spillover is predominant. The authors find weak volatility transmission between mature and emerging markets around the global financial crisis; however, no evidence of volatility spillover during the same period exists. This study encourages international investors to evaluate new diversification opportunities in MENA markets that may not be available in major markets.