Country risk and stock market volatility,predictability, and diversification in the Middle East and Africa |
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| Institution: | 1. Leicester Castle Business School, De Montfort University, The Gateway, Leicester, LE1 9BH, UK;2. Centre for Financial and Corporate Integrity, Coventry University, Priory Street, Coventry, CV1 5FB, UK;1. Massey University, New Zealand;2. Auckland University of Technology, New Zealand;1. USEK Business School, Holy Spirit University of Kaslik, PO BOX 446, Jounieh, Lebanon;2. Plymouth Business School, Plymouth University, Plymouth, UK;3. Department of Economics and Finance, United Arab Emirates University, Al-Ain, United Arab Emirates;1. College of Business and Economics, UAE University, United Arab Emirates;2. School of Business and Management, American University of Sharjah, United Arab Emirates |
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| Abstract: | With globalization, an understanding of country risk (political risk (PR), financial risk (FR), and economic risk (ER)) and its impact on stock market return volatility and predictability is important for evaluating direct investment and country selection decisions in globally and regionally diversified portfolios. This paper examines these issues in the context of the Middle East and Africa (MEAF) and analyzes 10 stock markets in the region over the period 1984–1999. After examining volatility and predictability, this paper explains how portfolios of stocks can be formed from these countries in order to achieve mean–variance efficient portfolios. This paper generally finds that country political, financial and economic risks significantly determine stock volatility and predictability. The diversification exercise shows that an international investor can still benefit by diversifying into the stock markets of Middle East and African countries. |
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