Financial stress dynamics in the MENA region: Evidence from the Arab Spring

• Published in: Journal of international financial markets, institutions & money institutions & money, 2019-09, Vol.62, p.20-34
• Main Authors: Elsayed, Ahmed H., Yarovaya, Larisa
• Format: Article
• Language: English
• Subjects: Dynamic frequency connectedness; Financial stress indexes; Impact of Arab Spring; MENA economies; Spillover effect
• ISSN: 1042-4431; 1873-0612
• DOI: 10.1016/j.intfin.2019.05.004

•We analyse the financial stress transmission in the MENA region.•The short-term connectedness is mainly driven by cross-sectional correlations.•Results display existence of stress transmission in the long term.•After Arab Spring MENA countries became more isolated from the external shocks.•High intensity of stress spillovers before Arab Spring was due to the GFC. In this paper we analyse the impact of instability caused by the Arab Spring on the co-movements and volatility spillovers of aggregated Financial Stress Indices for eight MENA countries. Using a dynamic frequency connectedness framework, we conclude that stress transmission between markets is higher at low frequencies than at high frequencies, which implies that MENA markets are slow in adjusting to the information they receive. The Global Financial Crisis generated stronger spillover effects between MENA markets than the political turmoil of the Arab Spring. These results are useful for investors with different investment horizons, and have policy implications for the maintenance of financial stability in this region.