On the Robustness of Portfolio Diversification Benefits within MENA Stock Markets

Abstract

This study aims to examine whether the benefits of diversification within MENA stock markets are robust to changes across volatility regimes over the weekly period spanning from January 2004 to March 2025.  The methodology adopted in this paper is based on testing the stability of shock transmission mechanisms across markets in the presence of regime-switching volatility, using a bivariate Markov switching model. The findings show that, in general, intra-MENA market linkages are unstable, with little evidence of robust portfolio diversification benefits during turbulent periods. From the perspective of portfolio strategies, our results highlight differences in portfolio allocation depending on the volatility regime and the country group, due to their heterogeneous characteristics. These findings are of great interest to policymakers, who should consider short-term responses to prevent the spread of contagion during crisis periods.  

JEL: C32, F42, G15