Dependence between stock markets of MENA countries after sub-prime crisis using bivariate extreme value theory
by Ahmed Ghorbel; Zayneb Attafi
International Journal of Applied Management Science (IJAMS), Vol. 6, No. 4, 2014

Abstract: In this work, our objective is to study the linkages and interactions between eight markets: three developed financial markets and five emerging financial markets in the MENA region in terms of returns and volatility. Particular interest is given specially to study the intensity of dependence between these markets during extreme and volatile periods. Our methodology is to calculate, in a first step, the correlation coefficients between raw and squared residuals obtained from the GARCH family models to reduce the effect of autocorrelation. In a second step, we aim to apply the bivariate extreme value theory (EVT) to filtered data by the GARCH model to study the dependence between the extreme events. We compare correlation coefficient obtained with GARCH models and their obtained from bivariate EVT method. Empirical results show that the US market is the leader as it influences, in terms of return, all other markets. Dependences between MENA region's markets are higher between extremes than between ordinary observations registered during normal periods, but they offer many opportunities to investors to diversify their portfolio and reduce their degree of risk aversion. Dependence between markets increases during volatile periods.

Online publication date: Sat, 07-Feb-2015

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