Munich Personal RePEc Archive

Return dynamics and volatility spillovers between FOREX and MENA stock markets: what to remember for portfolio choice?

Arfaoui, Mongi and Ben Rejeb, Aymen (2015): Return dynamics and volatility spillovers between FOREX and MENA stock markets: what to remember for portfolio choice?

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Abstract

This article investigates stock-forex markets interdependence in MENA countries for the period spanning from February 26, 1999 to June 30, 2014. The analysis has been performed through three competing models; the VAR-CCC-GARCH model, the VAR-BEKK-GARCH model and the VAR-DCC-GARCH model. Our findings confirm that both markets are interdependent and corroborate with stock and flow oriented approaches. We find also that, comparing to optimal weights, hedge ratios are typically low, which denote that hedging effectiveness is quite good. Estimation of hedging effectiveness allow concluding that the incorporation of foreign exchange in a full stock portfolio increase the risk-adjusted return while reducing its variance. We note here that the forex market is overweighed for both portfolio designs and hedging strategies. More importantly, this evidence holds for all countries as well as for all considered models. These findings open up new insights for managerial and governmental policy purpose.

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