Stochastic Trends and Stock Prices in Emerging Markets: The Case of Middle East and North Africa Region

Abstract

In this paper, the individual stochastic structure of a log of weekly stock indices from Turkey, Israel, Egypt, Morocco and Jordan of MENA markets are investigated. Results from different unit root tests indicate that all five series seem to contain a stochastic trend and thus are nonstationary in levels. Presence of a unit root implies that shocks to stock prices are permanent and consequently, stock prices may not be predictable. Tests are also conducted to examine the common stochastic trends in a system of these emerging stock prices. No evidence of cointegration is detected in these emerging markets. Therefore, the stock markets of MENA region are segmented and do not exhibit any long-run co-movements. This in turn implies the existence of potential gains from international stock market diversification.