Investigating the Relationship Between Financial Stress Index and MENA Stock Markets Performance

Abstract

This article assesses the effect of financial stress caused by the great depression, 2008–2009, Oil crises of 2014–2015 accompanied by the sharp fall in the oil prices and the Arab Spring on the co-movements and volatility spillovers of aggregated Financial Stress Indices for eleven MENA countries. It is reveals that the extreme values of the FSIs are generally connected with well-known past financial stress episodes. We also found, for MENA Ex GCC countries, a weak interconnection between these countries while the GCC countries are more connected. Using a Vector auto-regression (VAR) estimation framework, we showed that the performance of the stock indices depends positively on its past and also, the stress index positively depends on his past delayed either by one or two periods. While, the study of impulse response functions shows that a positive shock on the financial stress index translates into a negative effect on stock market performance during the first year. This effect then disappears in slow motion before finding its long-term level.