Integration versus segmentation in Middle East North Africa Equity Market: Time variations and currency risk

This article investigates the dynamics of regional financial integration and its determinants in an international setting. We test a conditional version of the international capital asset pricing model (ICAPM) accounting for the deviations from purchasing power parity (PPP) as well as temporal variations in both regional and local sources of risk. Using data from seven major countries of the Middle East North Africa (MENA) region (Turkey, Israel, Egypt, Jordan, Syria, Kuwait and Tunisia), our results support the validity of ICAPM and indicate that the risk is regionally priced. Furthermore, we show that changes in the degree of regional stock market integration are explained principally by inflation, exchange rate volatility, rate spread variations, short-term interest rate and world market dividend yield.