Fractional integration in the equity markets of MENA region

Abstract

A major issue in financial economics is the behaviour of stock market returns over long horizons. This article provides an empirical investigation of the long-range dependence in the emerging stock markets of Egypt, Jordan, Morocco and Turkey. We use the modified rescaled range statistic (R/S) proposed by Lo ( 1991 Lo, AW . 1991. Long-term memory in stock market prices. Econometrica, 59: 1279–313. [Crossref], [Web of Science ®] [Google Scholar] ) and the rescaled variance statistic (V/S) developed by Giraitis et al . ( 2003 Giraitis, L , Kokoszka, PS , Leipus, R and Teyssiere, G . 2003. Rescaled variance and related tests for long memory in volatility and levels. Journal of Econometrics, 112: 265–94. [Crossref], [Web of Science ®] [Google Scholar] ) to investigate the long memory in the returns and volatility. Significant long memory is demonstrated in the series and implies a fractal market structure in the Middle East and North African (MENA) equity markets. We further investigate whether the long memory is caused by a shift in variance. Interestingly, our findings indicate that the presence of long memory in volatility due to shifts in variance cannot be confirmed for these markets and are consistent with those results obtained by Lobato and Savin ( 1998 Lobato, IN and Savin, NE . 1998. Real and spurious long memory properties of stock-market data. Journal of Business and Economics Statistics, 16: 261–8. [Taylor & Francis Online], [Web of Science ®] [Google Scholar] ) on other markets. Thus, our results should be useful to regulators, practitioners and derivative market participants in the MENA region, whose success depends on the ability to forecast stock price movements over long horizons.