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An Empirical Investigation Of Stock Market Behavior In The Middle East And North Africa

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Executive Summary

This paper studies excess market returns in the relatively understudied financial markets of nine Middle Eastern and North African (MENA) countries within the context of three variants of the Capital Asset Pricing Model: the static international CAPM; the constant-parameter intertemporal CAPM; and a Markov-switching intertemporal CAPM which allows for the degree of integration with international equity markets to be time-varying. On the whole the authors find that: Israel and Turkey are most strongly integrated with world financial markets; in most other MENA markets examined there is primarily local pricing of risk and evidence of a positive risk-return trade-off ; and there is substantial time variation in the weights on local and global pricing of risk for all of these markets.

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