Financial Contagion in Emerging Markets: Evidence from the Middle East and North Africa

The purpose of this paper is to investigate vulnerability to financial contagion in a set of expanding emerging markets of the Middle East and North Africa, during seven episodes of international financial crisis. Using Fry & Baur (2005) fixed-effect panel approach, we significantly reject the hypothesis of a joint regional contagion. However, using a battery of bivariate contagion tests based on Forbes and Rigobon (2002), Corsetti (2002), and Favero and Giavazzi (2002), we find evidence that each of the investigated markets suffered from contagion at least once out of the seven investigated crises. In conformity with the literature, our results suggest that the probability of being affected by contagion seems to increase as the MENA markets develop in size and liquidity, and become more integrated to the world’s markets.Note: Length:

Equity Markets and Economic Development: What Do We Know

The objective of this paper is to review the transmission mechanisms uniting equity market development and economic growth in developing countries. We find that the theoretical impact of equity markets is ambiguous. At the domestic level, the allocation function of equity markets appears conditioned by the extent of informational efficiency. Turning to international linkages, theoretical models suggest that equity market integration lowers the cost of capital, increases financial vulnerability and has a mixed impact on capital flows. Taking this into account, two conclusions arise. First, equity market development policies should focus on reaching and maintaining adequate levels of institutional transparency. Second, the optimal degree of international integration depends on the society’s preference between international accessibility and domestic stability.Equity Markets, Economic Development.

Portfolio allocations in the Middle East and North Africa

We examine the issue of possible portfolio diversification benefits into seven Middle-Eastern and North African (MENA) stock markets. We construct international portfolios in dollars and local currencies. We compute the ex-ante weights by plugging five optimization models and two risk measures into a rolling block-bootstrap methodology. This allows us to derive 48 monthly rebalanced ex-post portfolio returns. We analyze the out-of-sample performance based on Sharpe and Sortino ratios and the Jobson-Korkie statistic. Our results highlight outstanding diversification benefits in the MENA region, both in dollar and local currencies. Overall, we show that these under-estimated, under-investigated markets could attract more portfolio flows in the future.Portfolio Allocation, Emerging Markets, Middle East and North Africa.

Equity market integration in the Middle East and North Africa: in search for diversification benefits

The purpose of this paper is to investigate the MENA’s potential for portfolio diversification benefits by examining long run equity linkages with daily data over the 1998-2004 periods. Our analysis is based on several co-integration analyses and an extension of Akdogan measures of financial integration. We first compare financial integration with the EU and the US. Results suggest that the MENA region is growingly segmented from both regions. Although integration is relatively higher with the EMU, diversification benefits for both EU and US investors are possible since segmentation levels appear converging. At the country level, our analysis displays no evidence of regional integration, thereby suggesting potential for local diversification. Integration scores also show that Egypt and Turkey should be relatively more appealing for the US investor and Israel, and Jordan and Morocco for the EU investor. Lebanon and Tunisia are two specific cases displaying opposite dynamics. A moving average analysis also shows that financial events, internal reforms and political shocks do not affect the region stock market linkages homogeneously; real economic integration seems to diminish financial segmentation. Finally, we approach the issue of short run linkages with a VAR-VECM methodology. Impulse response analysis shows that all markets seem to respond to each other, but that Turkey is unaffected by shocks occurring in the other markets. This ultimately raises questions on the dynamics of intra-regional contagion.Stock Market Integration, Portfolio Diversification, MENA markets, Time-varying methods.

Stock Market Predictability in the MENA: Evidence from New Variance Ratio Tests and Technical Trade Analysis

The objective of this paper is to test for predictability in the Middle-Eastern North African (MENA) markets by investigating both the weak-form efficiency hypothesis (WFEMH) and the presence of abnormal returns. Starting with tests for the random-walk hypothesis, we use daily data returns and a battery of econometric tests including unit-root analysis, individual and multiple variance ratio, wild bootstrapping and non-parametric tests based on ranks. Our results suggest that only the region’s largest markets, Israel and Turkey, follow a random walk. Turning to technical trade analysis, our results reinforce the hypothesis of stock market predictability. Both variable moving average (VMA) and trade range breaking (TRB) trade rules yield significant abnormal returns. We complete the analysis with profit simulations based on the breakeven costs computation methodology and taking into account local transaction costs. Our findings highlight the presence of significant portfolio investment opportunities in the MENA.Emerging markets, stock market predictability, portfolio analysis.

A closer look at financial development and income distribution

Working paper GATE 2011-04International audienceThis paper analyzes the under-investigated relationship uniting financial development and income distribution. We use a novel approach taking into account for the first time the specific channels linking banks, capital markets and income inequality, the time-varying nature of the relationship, and reciprocal causality. We construct a set of annual indicators of banking and capital market size, robustness, efficiency and international integration. We then estimate the determinants of income distribution using a panel Bayesian structural vector autoregressive (SVAR) model, for a set of 49 countries over the 1994-2002 period. We uncover a significant causality running from financial sector development to income distribution. In addition, the banking sector seems to exert a stronger impact on inequality. Finally, the relationship appears to depend on characteristics of the financial sector, rather than on its size

Global crisis and Financial destabilization in ASEAN countries. A microstructural perspective

Working paper GATE 2011-03This paper investigates wether the ongoing financial crisis has destabilized the microstructures of ASEAN stock market. Using daily stock market data from 2007 to 2010, we first develop a set of monthly country-level liquidity, efficiency, international integration and volatility indicators. We then analyze the impact of global market volatility shocks on those indicators, using a set of Bayesian S-VAR models. Finally, forecast error variance decomposition analysis and impulse response function permits to identify the magnitude and the symmetry of ASEAN financial systems' exposures to international shocks. Our results uncover significant and asymmetrical schock transmission channels. We draw implications for the design of future integration initiatives

Does stock market development always improve firm-level financing? Evidence from Tunisia

ACL-4International audienceThe question of whether or not increased stock market size allows for improved financing conditions for firms in emerging markets is an important one for policy-making. This paper seeks to investigate this issue by analyzing whether increases in market-level liquidity have indeed trickled down to individual firms over the last decade of stock market development in Tunisia, a fast-growing Mediterranean emerging market. We develop time varying liquidity scores for all firms listed in the Tunisian market over the 1997–2009 period and analyze the extent to which market development, firm-level characteristics and risk exposure affect the magnitude and the distribution of liquidity using a set of fixed effect panel regressions. Our results suggest that massive increases in value traded have created market congestion, thereby increasing the costs of trading, in a context of persistently low efficiency and increased international integration. The main implications of this process are (i) market-level development and international integration are not sufficient conditions to ease access to finance for local firms, (ii) further reforms in the Tunisian market should focus on diversifying corporate ownership and improving the disclosure of information, and (iii) international investors seeking diversification in Tunisia should be aware of a significant illiquidity risk

Financing the Sustainable Development Goals

This paper contends that carving out pathways to finance the sustainable development goal (SDG) agenda entails to reconsider tacit assumptions regarding the functioning of financial systems. We first use a history of economic thought perspective to demonstrate the flaws of the loanable fund theory, which has come to underlie SDG finance strategies. We then introduce the alternative endogenous money theory using a consistent theoretical and accounting framework. This allows us to identify and discuss a set of financing mechanisms that would permit to bridge the SDG budget gap. These mechanisms include the issuing of sovereign green bonds, the modification of the European Central Bank’s collateral framework, changes in capital adequacy ratios, a market of SDG lending certificates and the introduction of rediscounting policies. We back up the discussion with examples from economic history