Abstract
This study investigates return and asymmetric volatility spillovers and dynamic correlations between the main and small and medium-sized enterprise (SME) stock markets in Saudi Arabia and Egypt for the periods before and during the COVID-19 pandemic. Return and volatility spillovers are modelled using a VAR-asymmetric BEKK–GARCH (1,1) model, while a VAR-asymmetric DCC–GARCH (1,1) model is employed to model the dynamic conditional correlations between these markets, which are then used to determine and explore portfolio design and hedging implications. The results show that while bidirectional return spillovers between the main and SME stock markets are limited to Saudi Arabia, shock and volatility spillovers have different characteristics and dynamics in both main–SME market pairs. In addition, the dynamic correlations between the main and SME markets are mostly positive and have notably increased during the COVID-19 pandemic, particularly in Saudi Arabia, suggesting that adding SME stocks to a main stock portfolio enhances its risk-adjusted return, especially during tranquil market phases. One practical implication of our results is that the development of SME stock markets can indirectly contribute to economic development via the main market channel and provide an avenue for portfolio diversification and risk management.
Highlights
Received: 23 November 2021The interdependencies between financial markets, especially during turbulent times, have long attracted considerable interest among finance academics and practitioners.Changes in the dependence structure, during periods of market turmoil, are of great concern to market participants and policymakers
The two largest economies in the region, and explored the availability of portfolio diversification and hedging opportunities in hedging effectiveness index is higher for the period before the COVID-19 pandem the periods before (62.95%), and duringwhich the COVID-19 pandemic
The result of the estimation of the asymmetric DCC–GARCH (1,1) model reveals that the timeThis paper analyzed how return and volatility spillovers arise within the m varying conditional correlations between the main and small and medium-sized enterprises’ (SMEs) markets are mostly positive
Summary
Received: 23 November 2021The interdependencies between financial markets, especially during turbulent times, have long attracted considerable interest among finance academics and practitioners.Changes in the dependence structure, during periods of market turmoil, are of great concern to market participants and policymakers. The interdependencies between financial markets, especially during turbulent times, have long attracted considerable interest among finance academics and practitioners. Investors should adjust their portfolios taking cross-market spillovers into consideration to mitigate contagion risks. On the other hand, should take appropriate measures to maintain market stability during crisis episodes (Baumöhl and Lyócsa 2014; Hemche et al 2016; Karanasos et al 2014). Similar to the spread of the COVID-19 virus itself, the heightened volatility of asset prices during the pandemic was transmitted across markets through the mechanism of contagion, which is amplified by saturated media coverage (Akhtaruzzaman et al 2021b). The sheer scale of the unfolding pandemic led to an unprecedented proliferation of studies on financial market dynamics, aimed at understanding the linkages within and between
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