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Financial contagion and the MENA Region

Shrydeh, Najib


Najib Shrydeh


The rapid growth of capital markets in emerging countries exerts a significant impact upon the future of the global economy. The spread of a shock, or crisis, from one originating market to other destination markets is a manifest phenomenon of recent decades. The 2008 Global Financial Crisis is frequently reported as the most unrelenting since the Great Depression of 1929. The overwhelming global impact of the crisis caught the world almost entirely by surprise. Financial contagion has grown in scope to become a subject not only of academic curiosity, but is also very much at the centre of the global political economy. The literature reviewed in this thesis thoroughly examines financial crises which have occurred since the 1980s, relating to the US market as well as other developing markets in Latin America and East Asia.
The Middle East and North Africa (MENA) region contains the vast majority of oil and natural gas reserves in the world. Conservative estimates record its known oil reserves at 50% of the global total while natural gas reserves are estimated at over 40% of the world total. Further, in terms of flows, the region accounts for more than 35% of global oil production and over 20% of world natural gas production. It has one of the fastest growing populations in the world, estimated at more than 350 million (approximately 6% of the global total). Thus, financial contagion, to and from the MENA region, demands further investigation, particularly as there is a paucity of existing literature on this topic.
A total of 39 world stock markets are examined in this thesis, including eight from the MENA region, and spanning six different crises over the period 1987 to 2008. More specifically, this thesis provides a cross-market analysis of daily composite stock price indices and uses short-term interest rates in a variety of filtering processes. The size of the data set is manipulated in order to observe the possible short and long-term dynamics of contagion. To test for contagion, this thesis presents a replication of the seminal works of Forbes and Rigobon (2002) and Chiang et al. (2007), whilst introducing several extensions to these methodological approaches. When using the Forbes and Rigobon methodology, the results suggest that the correlation-based test of contagion employed in the original study is biased and that the detection of contagion is sensitive to the method of filtering the returns. When using the Chiang et al. methodology, the results are widely consistent with those found in the original study, showing evidence of contagion in a large number of destination markets. Moreover, the results when both methodologies are employed suggest that contagion is more likely to be observed when the data set is expanded (typically exceeding a period of ten years per crisis examined), and when the US is the source of contagion to most of the developed, Latin American, and other emerging stock markets included in this thesis.
The Forbes and Rigobon and Chiang et al. methodologies examine the correlations produced by the transmission mechanism but fail to address the transmission mechanism of contagion directly, a shortcoming which this thesis tackles by means of an alternative methodology. The alternative methodology, proposed by the researcher in this thesis, addresses the transmission mechanism which produces these correlations. The results show that contagion is more likely to occur when using a narrow data set (approximately two years per crisis examined), and that the evidence of contagion is mitigated when the data set is expanded. Further, the findings in relation to all three methodologies show that the financial markets in the MENA region are distant from global markets, and are best described as regionally integrated.


Shrydeh, N. Financial contagion and the MENA Region. (Thesis). University of the West of England. Retrieved from

Thesis Type Thesis
Keywords contagion, volatility, 2008 global financial crisis, GARCH, DCC-GARCH.
Public URL
Award Date Jun 16, 2014

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