Global and regional co-movement of the MENA stock markets

Abstract

This paper examines the co-movement of selected MENA region stock markets with the U.S. stock market and the regional co-movement among these markets over the period from June 2002 to June 2010. For this purpose, we apply the analysis of wavelet squared coherency with simulated confidence bounds. The methodology enables the simultaneous assessment of short term and long term stock market co-movement and detects change in market relationships over time. The evidence suggests a modest degree of co-movement of stock returns between S&P 500 and MENA stock markets at higher frequencies, implying enhanced short term diversification gains. Dependencies with the U.S. stock market intensify toward the end of the stock return series, supporting the increasing trend toward international capital market co-movement. The evidence also shows a relatively high degree of co-movement among stock markets in the MENA region at lower frequencies across the entire sample, and these dependencies increase toward the end of the sample period.