Title:
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Stock prices and exchange rates interaction in the MENA region
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This thesis examines the relationship between exchange rate changes and stock returns, focusing
on six Middle East and North African emerging markets: Egypt, Kuwait, Morocco, Oman, Saudi
Arabia and Turkey. The aforementioned relationship is explored at different levels of
aggregation for the stock market (from country to finn level). Three papers are presented in this
thesis. The first paper considers the linkage between stock prices and exchange rates in four
Middle East emerging markets. In contrast to the existing evidence that uses a global market
index to uncover such a relationship I find that for my sample countries oil prices emerge as the
dominant factor in the above relationship. I consider the presence of regime shifts and I find
evidence of cointegration only'for the period following the 1999 oil price shock. Readjustment
towards equilibrium in each stock market occurs via oil price changes. Finally, I perfonn a
number of robustness checks and produce persistence profiles.
In the second paper, I examine the presence of volatility spillovers between nominal
exchange rates and stock returns in three MENA countries: Egypt, 'Morocco and Turkey. The
multivariate GARCH model which I use does not produce evidence of cross-market effects for
the general stock indices returns. Nevertheless, bidirectional shock and volatility spillovers
between exchange rates and sector stock returns exist at the industry sector level. Those findings
are more pronounced in Egypt and Turkey. The different results are due to the different
exchange rate regimes/policies adopted by the three countries. While exchange rates in Egypt
and Turkey were allowed to float, Morocco followed a more tightly managed exchange rate
regime.
The third paper tests for the impact of announcing floating and devaluating the exchange
rate on stock returns in three MENA countries namely, Egypt, Morocco and Turkey_ I, first, use
the event study methodology put forward by Hilliard and Savickas (2002), testing for eventinduced,
abnonnal volatility in the stock returns. I, then, use three different methodologies to testfor abnonnal returns. These are, first, the approach given by Brown and Warner (1980), and the
remaining two, which control for event induced volatility, are based upon the study of Boehmer.
Musumeci and Poulsen (1991), and upon the method fonnulated by Savickas (2003). I find clear
evidences of abnonnal volatility and abnonnal return due to this event in Egypt and Turkey. but I
could not find such evidence in Morocco
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