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Testing for “Contagion” of the Subprime Crisis on the Middle East and North African Stock Markets: A Markov Switching EGARCH Approach

Author

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  • Khallouli, Wajih

    (Ecole Supérieure des Sciences Economiques et Commerciales de Tunis- University)

  • Sandretto, René

    (GATE Lyon St Etienne)

Abstract
In this paper, we investigate whether the recent financial turmoil which arose in the United States has contaminated the Middle East and North African countries (MENA). In contrast to Lagoard-Segot and Lucey (2009), we try to identify the existence of pure contagion (Masson, 1999) rather than shift-contagion (Rigobon, 2003). Then, we explicitly define financial “contagion” in accordance with Eichengreen et al. (1996) and we extend the Cerra and Saxena (2002) methodology by using a Markov-Switching EGARCH model introduced by Henry (2009) in order to identify contaminated MENA stock markets. Our results provide evidence of a persistence of recession characterised by low mean/high variance regimes which coincides with the third phase of the subprime crisis. In addition, there is evidence of mean and volatility contagion in MENA stock markets caused by the US stock market.

Suggested Citation

  • Khallouli, Wajih & Sandretto, René, 2012. "Testing for “Contagion” of the Subprime Crisis on the Middle East and North African Stock Markets: A Markov Switching EGARCH Approach," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 27, pages 134-166.
    • Handle: RePEc:ris:integr:0564
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    2. Guyot, Alexis & Lagoarde-Segot, Thomas & Neaime, Simon, 2014. "Foreign shocks and international cost of equity destabilization. Evidence from the MENA region," Emerging Markets Review, Elsevier, vol. 18(C), pages 101-122.
    3. Eli Bouri & Andre Eid & Imad Kachacha, 2014. "The Dynamic Behaviour and Determinants of Linkages among Middle Eastern and North African Stock Exchanges," Economic Issues Journal Articles, Economic Issues, vol. 19(1), pages 1-22, March.
    4. Musumba Batondo & Josine Uwilingiye, 2022. "Comovement across BRICS and the US Stock Markets: A Multitime Scale Wavelet Analysis," IJFS, MDPI, vol. 10(2), pages 1-21, April.
    5. Kaabia, Olfa & Abid, Ilyes & Guesmi, Khaled, 2013. "Does Bayesian shrinkage help to better reflect what happened during the subprime crisis?," Economic Modelling, Elsevier, vol. 31(C), pages 423-432.
    6. Christian Manicaro, 2022. "The link between regional CDS spreads and equity returns: a multivariate GARCH approach," SN Business & Economics, Springer, vol. 2(2), pages 1-15, February.
    7. Abubakar Jamaladeen & David E. Omoregie & Samuel F. Onipede & Nafiu A. Bashir, 2022. "A regime-switching skew-normal model of contagion in some selected stock markets," SN Business & Economics, Springer, vol. 2(12), pages 1-20, December.
    8. WAJIH KHALLOULI & MOHAMED Ayadi & RENE SANDRETTO, 2013. "Fondamentaux, Contagion Et Dynamique Des Anticipations :Une Evaluation A Partir De La Crise Financiere Coreenne," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 56(2), pages 175-189.
    9. Elie I Bouri, 2013. "Correlation and Volatility of the MENA Equity Markets in Turbulent Periods, and Portfolio Implications," Economics Bulletin, AccessEcon, vol. 33(2), pages 1575-1593.
    10. Ozcan Ceylan, 2023. "Analysis of Dynamic Connectedness among Sovereign CDS Premia," World Journal of Applied Economics, WERI-World Economic Research Institute, vol. 9(1), pages 33-47, June.

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    More about this item

    Keywords

    Subprime Crisis; Contagion; MENA Stock Markets; Markov Switching EGARCH Model;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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