Nonlinear Network Connectedness: Assessing Financial Risk Transmission in MENA and Influence of External Financial Conditions

Posted: 30 Nov 2023

See all articles by Mehmet Balcilar

Mehmet Balcilar

University of New Haven

Ojonugwa Usman

Istanbul Ticaret University

Gazi Duman

University of New Haven

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Date Written: November 13, 2023

Abstract

This study investigates the influence of global financial market conditions on financial risk connectedness and transmission among the Middle East and North Africa (MENA) economies. Utilizing weekly realized stock market volatilities as a measure of risk and employing a smooth transition threshold vector autoregressive (STVAR) model to analyze risk transmission under varying levels of financial stress, the authors also examine the impact of external macroeconomic conditions on the risk connectedness of MENA economies. The results indicate that the overall connectedness, based on a standard VAR model, is moderate at 48.34%. However, in the low financial stress regime, overall connectedness increases to 52.79%, and in the high financial stress regime, it rises to 72.94%, indicating stronger risk interdependency among MENA countries during times of high stress. In the high financial stress regime, Kuwait, Oman, Qatar, Saudi Arabia, Turkey, and the United Arab Emirates are identified as net risk transmitters among MENA countries. The study also reveals that risk transmission across MENA is more pronounced in the regime-dependent model compared to the overall mean-based VAR model.

Keywords: Financial connectedness, risk transmission, economic uncertainty, financial conditions, regime switching, MENA

JEL Classification: C32, E32, E44, F42, G15

Suggested Citation

Balcilar, Mehmet and Usman, Ojonugwa and Duman, Gazi Murat, Nonlinear Network Connectedness: Assessing Financial Risk Transmission in MENA and Influence of External Financial Conditions (November 13, 2023). Available at SSRN: https://ssrn.com/abstract=4631734

Mehmet Balcilar (Contact Author)

University of New Haven ( email )

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West Haven, CT 06516
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HOME PAGE: http://www.mbalcilar.net

Ojonugwa Usman

Istanbul Ticaret University

Gazi Murat Duman

University of New Haven ( email )

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