An Empirical Study on the Political Economy of MENA Financial Markets in Crises

• In Event: Poster Session: Middle East and North African Politics & Posters on Europe
  In Poster Session: Poster Session: Middle East and North African Politics

Abstract

This paper aims to understand the political economy of financial markets in the Middle East and North Africa (MENA) region. To achieve this objective, the study examines financial integration in the Arab World as one form of regionalization and its relationship with regionalism among Arab countries and regionalism in the Middle East and North Africa (MENA) during (1998-2021). Moreover, the paper addresses the impacts of different kinds crises, political and non-political, on MENA’s financial markets and their co-movements together as well as with other global markets. Therefore, the study attempts to answer the following questions: Are financial markets in the MENA region integrated with each other and/or with other major world markets including BRICS, the EU, and the USA? Do financial crises and political instabilities affect financial integration within the MENA region? How does financial integration link to regionalism in the Arab World and MENA?
To answer its main research questions, the paper first descriptively analyzes the time evolution of different indicators of MENA’s financial markets and examine their behavior and co-movements during crises. Annual and daily Returns of MENA’s stock markets and bank indices are analyzed. Additionally, the research uses an econometric approach to study integration. Similar to previous literature, the study will employ the Correlational, Co-integration, and Granger Causality analyses to examine global and regional integration in MENA. Correlations among the returns of MENA’s financial markets and between them and global markets are calculated to examine integration. Furthermore, Co-integration and Granger Causality tests are used to investigate the long and short run relationships and direction of impact among different stock markets. To assess integration within MENA, a regional integration index is constructed using the yearly averages of the correlation coefficients of the daily returns of each stock market and other MENA markets. For global integration, the percentage of net foreign assets to GDP is used as one de factor indicator of the international integration of MENA countries. Since de jure measures might not reflect actual flows, it is important to use de facto and de jure measures together to accurately assess financial integration (Ekpo & Chuku, 2017). Accordingly, the paper employs the percentage of net foreign assets to GDP as a de facto measure of international integration. The Chinn-Ito or KAOPEN index of capital account openness is employed by the study as a de jure measure of integration. Quinn et al. (2011) recommended using the index of Chinn-Ito index (KAOPEN) as the de jure measure of financial integration. This index detects the legal restrictions on capital flows in different countries around the world. It is considered to be a measure of financial integration or openness since it describes the capital controls that exist in the economy; the higher the value of the index the more open and integrated the market is (Frey & Volz, 2013; Galindo et al., 2010). Finally, the paper also analyzes foreign bank penetration as another de facto measure of global financial integration in the banking sector.

Author

• Samar Abdelmageed, The British University in Egypt