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CASE STUDY

Political Uncertainty and Stock Market Volatility in the Middle East and North African Countries

Frankie Chau and Rataporn Deesomsak (both Durham University Business School) and Jun Wang (Leeds University Business School

Through the ages, political instability has led to crises in stock markets as a result of the expectation — or fear — of associated political change. Events such as the New York terror attacks of 9/11 had worldwide financial impacts, and there is a large body of literature to demonstrate this. More recently, the Arab Spring of 2010 triggered widespread and ongoing change across the Middle East and North Africa (MENA) region.

Even reforms that lead to positive changes are often accompanied by uncertainties and can have a negative effect upon stock market volatility and investor confidence — with significant knock-on effects on regional and global financial health. With this in mind, a team of researchers led by Frankie Chau of Durham University Business School set out to look at exactly how the events of the Arab Spring changed the financial context of business and investment. Specifically, they sought to identify whether and to what extent the social and political revolutions across the region had an impact on stock market volatility within the MENA countries and to examine how far political changes affected Islamic stock market indices relative to the other more conventional types of stock.

Assessing the Market Impacts of the Arab Spring

The research team evaluated the impacts through statistical analysis of a dataset covering the stock market closing prices from six MENA countries — Bahrain, Kuwait, Oman, Egypt, Jordan, and Lebanon — which were selected to cover a range of developing and developed economies. These data were measured against benchmark indices which were used as a control for the concurrent events in regional, national and global contexts; different ‘dummy variables’ were included to ensure that the results were robust.

The process of analysis subdivided the dataset into Islamic and conventional stock market indices, representing different approaches to business. The former, based upon Sharia law, excludes certain industrial sectors (most notably those which involve lending with interest) and is more likely to include others (such as oil and gas).

Financial Impacts of the Arab Spring

The analysis tested the hypothesis that the impacts of the Arab Spring (if any) would affect Islamic stock markets more than conventional alternatives. The results indicated that the volatility of the stock markets did indeed increase in the aftermath of the political turbulence which rippled through the region in early 2010 — and that the impact on the Islamic stock market was significantly greater. Further, there was no evidence that the resultant political change did anything to enhance the levels of integration between stock markets in the MENA countries and those in the rest of the world.

The findings of the study represent a significant contribution to an ongoing discussion around the impacts of political risk in general, and the Arab Spring in particular. In addition, they offer evidence of the need for newly-emerging governments — in the MENA region and elsewhere — to act to restore business and investor confidence in the wake of political revolution.