Emerging Markets Reward Risk: Empirical Evidence from MENA during 2008 Financial Crisis

Emerging Markets Reward Risk: Empirical Evidence from MENA during 2008 Financial Crisis

Salim Lahmiri (Department of Computer Science, University of Quebec at Montreal, Montreal, QC, Canada, & ESCA School of Management, Casablanca, Morocco) and Stephane Gagnon (University of Quebec in Outaouais, Gatineau, Canada)
DOI: 10.4018/978-1-5225-3932-2.ch021
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The relationship between risk and return in Middle East and North Africa (MENA) region stock markets is estimated during 2008 international financial crisis; including Jordan, KSA, Morocco, and Turkey. For comparison purpose, stock markets from Europe are also examined; including, FTSE (UK), CAC40 (France), DAX (Germany), and the Swiss market. The empirical findings show evidence that; contrary to European stock markets; MENA region stock markets generally reward risk during 2008 financial crisis. This result is important for international asset managers and investors to consider investing in emergent markets from MENA region.
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1. Introduction

Recently, several works have focused on studying stock market; including examining market efficiency (Lahmiri et al, 2014; Lahmiri, 2013a, 2014a, 2014b, 2015, 2016a, 2016b, 2016c), modeling and forecasting market prices (Lahmiri, 2011; Lahmiri, 2012b, 2012c; Lahmiri & Boukadoum, 2015), and investigating the effects of technology and governance on market behavior (Ikpefan & Oligbo, 2012; Narang, 2012; Choudhury, 2013; Shaw et al, 2014). Besides, the linkage between asset risk and return is an interesting issue in portfolio management and corporate finance that merits deeper investigation in emergent markets. Indeed, the risk-return relationship (Merton, 1973, 1980) has become an important concern for investors and academicians. From a theoretical point of view, in equilibrium additional risk taken by an investor should be compensated through higher expected return according to theory (Merton, 1973, 1980). As a result, risk and return are expected to be positively related.

In practice, each investment instrument in the financial markets including stock, bonds, and derivatives is characterized by a return expectation and its associated risk. For instance, an investor who is willing to buy a given stock wants to understand the relationship between its volatility and returns. Such information is helpful for buy/sell/hold decision-making and portfolio diversification. Indeed, investments can no longer be selected based on their returns but also by considering their respective risk measured by volatility. For example, a high (low) risk asset is expected to yield high (low) return. Thus, an asset with high return and low risk is preferable than another one with low return and high risk. In this regard, risk modeling is receiving a growing interest; for instance; in finance and energy applications (Lahmiri, 2012a, 2013b, 2013c). This growing interest in the topic may have been motivated by the following three elements. First, the existence of economic theory that provides foundations of relationship between asset risk and return. Second, there exist several advanced econometric methods for time series analysis and modeling to capture variability in financial data. Third, there are several empirical studies that documented the subject across international market. In this regard, comparisons could be performed.

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