On Risk and Return in MENA Capital Markets

30 Pages Posted: 17 Sep 2003

See all articles by Eric Girard

Eric Girard

Siena College - School of Business

Mohammed Omran

The Insurance Holding Company; Arab Academy for Science and Technology

Tarek S. Zaher

Indiana State University - Scott College of Business


This paper investigates relationships between market risk premium, time-varying variance and time-varying covariance in eleven Middle Eastern and North African (MENA) markets and eight developed markets from 1990 to 2001. Following Pettengill, Sundaram and Mathur (1995), we argue that the Capital Asset Pricing Model has only been partially examined because the negative portion of the market risk premium distribution has not been priory fully investigated. This issue is addressed by implementing a state-dependent multivariate GARCH methodology to proxy for a risk-return relationship. As a result, significant positive and negative relationships between risk premiums and conditional variance (covariance) are found in MENA capital markets (developed markets). We conclude that MENA markets are highly segmented and provide diversification benefits to the global investor. We test for asymmetric patterns of reward to risk and observe that six out of the eleven MENA markets return series exhibit overly pessimistic reactions unwarranted by market variance alone. This finding supports the overreaction hypothesis and sets grounds for contrarian portfolio strategies.

Keywords: CAPM, Conditional risk, Market price of risk, Overreaction hypothesis, MENA markets

JEL Classification: G12, G15

Suggested Citation

Girard, Eric and Omran, Mohammed M. and Zaher, Tarek, On Risk and Return in MENA Capital Markets. Available at SSRN: https://ssrn.com/abstract=420244 or http://dx.doi.org/10.2139/ssrn.420244

Eric Girard (Contact Author)

Siena College - School of Business ( email )

Siena Hall 301
515 Loudon Road
Loudonville, NY 12211-1462
United States

Mohammed M. Omran

The Insurance Holding Company ( email )

7 Talet Herb Street

Arab Academy for Science and Technology ( email )

P.O. Box. 1029
College of Management and Technology
Miami, Alexandria
(203) 5482 532 (Phone)
(203) 5566 072 (Fax)

Tarek Zaher

Indiana State University - Scott College of Business ( email )

800 Sycamore Street
Terre Haute, IN 47809
United States

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