Geopolitical Risks, Returns, and Volatility in the MENA Financial Markets: Evidence from GARCH and EGARCH Models

Abstract

This paper aims to examine the effect of geopolitical risks on the daily returns and volatilities of the MENA indices over the period 2016-2022. This study investigates the returns and volatilities in the MENA indices covering two important geopolitical events: the first period includes the repercussions of the Arab Spring and tensions in the Gulf region starting from 3 January, 2016 to 30 December, 2019, while the second period relates to the current geopolitical risks of the war between Russia and Ukraine from 24 February, 2022 to 15 June, 2022. Two models were employed in the analysis, GARCH and EGARCH. Based on the GARCH model, geopolitical risks have no negatively and statistically significant effect on the daily returns of stock markets in the MENA region, except for Iraqi, Omani and Egyptian indices. The results also reveal that the volatilities of the MENA indices is statistically significant during the full sample period and geopolitical risk resulted from the repercussions of the Arab Spring and tensions in the Gulf region. For the period of the Russian-Ukrainian war and based on the EGARCH model, Geopolitical risk has a negative and statistically significant effect on the daily volatility for Bah-raini, Tunisian, Moroccan, Qatari and Dubai indices. The results provide strong evidence of leverage effect for the Kuwaiti and Moroccan indices. This paper provides an important insight for the government as decision makers and for investors as traders in the MENA region to realize the various risks.