Transmission of shocks and contagion from U.S. to MENA equity markets: The role of oil and gas markets

Abstract

Using a multifactor model augmented with oil and gas returns, this paper examines contagion from the US to MENA equity markets and studies the role of energy price fluctuations in amplifying the dependence between the US and MENA equity markets. We provide empirical evidence of a strong contagion effect originating from the US to MENA equity markets. The regional, oil and gas factors account for the bulk of the variance of the MENA equity returns and our findings suggest that the oil and gas markets play an important role in strengthening the dependence between the MENA and US markets during episodes of market turmoil. We discuss the policymaking importance of our results and propose a strategy to curb the adverse effects of US return shocks on MENA equity markets during episodes of stress. © 2019