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Impact of Arab uprising on Portfolio diversification benefits at different investment horizons for the Turkish investors in relation to the regional stock markets: Multivariate GARCH-DCC and Wavelet coherence approaches

Buriev, Abdul Aziz and Masih, Mansur (2015): Impact of Arab uprising on Portfolio diversification benefits at different investment horizons for the Turkish investors in relation to the regional stock markets: Multivariate GARCH-DCC and Wavelet coherence approaches.

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Abstract

The current political changes in the Arab countries have raised concerns about the behaviour of stock markets in the region. It brings an expectation of distortions in the behaviour of the regional financial markets. This study aims at analysing the dynamic relationship between Middle Eastern and North African equity markets exposed to the Arab Spring, namely Turkey, Egypt, Oman, and Lebanon, using Multivariate GARCH-DCC and Wavelet Coherence techniques on weekly data spanning from 2005 to 2015. We employ Multivariate GARCH-DCC to find out the time-varying volatilities and correlations between the markets, and Wavelet Coherence based on Continuous Wavelet Transform followed by the multiscale variance, covariance, and correlations based on Maximal Overlap Discrete Wavelet Transform are used for multi-resolution analysis to see the pattern of interactions between the stock markets across the time-scales: low, medium, and high. The findings tend to suggest that the correlations between the stock markets are quite low all over the period: on average, about 4% until the Global Financial Crisis and 10% afterwards. In general, the volatilities are relatively stable, except for the global financial turmoil period. In particular, equity markets of Lebanon and Egypt display a slightly higher volatility during the Arab Spring. It means that the Turkish investors who have allocated their investments in major trading partners like Egypt may not experience great diversification benefits for almost all investment horizons related to higher trade intensity but moderate benefits arise for Lebanon up to the investment horizons of 32-64 days and longer. However, portfolio diversification benefits are greater if Turkish investors invest in the Oman stock index except during long investment horizons. As for the long run, stock holding periods exceeding 32-64 days have minimal benefits for portfolio diversification. As an implication, Turkish investors should carry out the reassessment of their stock exposures and investment horizons more frequently.

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