Do volatility spillover and hedging among GCC stock markets and global factors vary from normal to turbulent periods? Evidence from the global financial crisis and Covid-19 pandemic crisis

In this paper, we use a bivariate VAR-asymmetric-BEKK-GARCH model to examine returns, asymmetric volatility spillovers, and time-varying correlations among GCC stock markets (Saudi Arabia, UAE, Qatar, Kuwait, Oman, and Bahrain) and five global factors (Islamic stocks, oil, gold, bonds, and real estate) from July 5, 2004, to March 31, 2021. To take into account the effects of the global financial crisis (GFC) and recent COVID-19 pandemic, we divide the sample period into four sub-periods: the full sample without COVID-19, pre-GFC, post-GFC, and the COVID-19 crisis. The empirical results indicate significant return and volatility spillovers between the GCC stock markets and global factors. Moreover, these spillovers between GCC stock markets and global factors increase in both the return and variance during turbulent periods (post-GFC and COVID-19 crisis periods). The time-varying correlations reveal that gold serves as a hedge and safe haven against most of the GCC stock markets in all sample periods, whereas the results vary across markets and sample periods for bonds, oil, Islamic stocks, and real estate assets against the GCC stocks. Our findings provide useful insights for investors and portfolio managers formulating trading strategies, determining asset allocation, and assembling optimal portfolios, since they persistently pursue challenging investment ideas and alternative asset classes, especially at times of financial crisis and global recession.

The COVID-19 Outbreak and Risk–Return Spillovers between Main and SME Stock Markets in the MENA Region

This study investigates return and asymmetric volatility spillovers and dynamic correlations between the main and small and medium-sized enterprise (SME) stock markets in Saudi Arabia and Egypt for the periods before and during the COVID-19 pandemic. Return and volatility spillovers are modelled using a VAR-asymmetric BEKK–GARCH (1,1) model, while a VAR-asymmetric DCC–GARCH (1,1) model is employed to model the dynamic conditional correlations between these markets, which are then used to determine and explore portfolio design and hedging implications. The results show that while bidirectional return spillovers between the main and SME stock markets are limited to Saudi Arabia, shock and volatility spillovers have different characteristics and dynamics in both main–SME market pairs. In addition, the dynamic correlations between the main and SME markets are mostly positive and have notably increased during the COVID-19 pandemic, particularly in Saudi Arabia, suggesting that adding SME stocks to a main stock portfolio enhances its risk-adjusted return, especially during tranquil market phases. One practical implication of our results is that the development of SME stock markets can indirectly contribute to economic development via the main market channel and provide an avenue for portfolio diversification and risk management.