Investigating the Arab stock markets during Arab spring

Arab spring triggered because of dictatorship, poverty, high unemployment rate and lack of economic opportunity in most Arab countries. The government in most Arab countries control the economy, for decades centralized and bureaucratic governments worked well to control citizens and the economy but failed to deliver economical and financial growth, prosperity and social justice. Arab economy is built on unearned sources almost one-third of Arab countries economy relies on oil and gas exports the other two-third relies on foreign aid which increase structural risk in both scenarios. Arab countries need an efficient and transparent social and economic system based on a competitive, entrepreneurial and inclusive private sector. Arab Spring protest and revolution began on 17 December 2010, when a Tunisian street vendor set himself on fire to protest his harassment by police. The Arab Spring had a significant negative impact on economic and financial activity in most Arab countries. Foreign capital has been fleeing the Arab region since 17 December 2010 when protests began in Tunisia, given all the uncertainty there is no way to know when long-term foreign capital will return to the Arab countries, Arab wealthy investors are transferring their funds to Europe and North America. Arab stock markets in general tend to be volatile, sometimes even when no serious problem presents itself in a specific market. Investors in Arab markets are therefore advised to potentially reduce risk through diversification among many different markets, and to maintain a long-term view. A good way for an individual to efficiently invest in Arab markets is through a mutual fund. Arab market funds concentrate on investments in these markets around the world or in a specific country or region. Because emerging market investment management may require extensive, and expensive, on-site company research, annual fund management expenses associated with these investments may be higher than for other types of mutual funds, Abumustafa (2007). Foreign direct investment (FDI) to Arab countries inflows decreased sharply during Arab spring, FDI inflows fell by 46 per cent during the first year of Arab spring. During 2011, the two main Arab stock markets in terms of market capita Egypt and Tunisia experienced major losses, both stock markets in Egypt and Tunisia lost about 50 per cent of total value and become very volatile. Volatility stemming from political and conflict started in the Arab countries have historically turned investors off from investing in the Arab countries. An examination of Arab stock markets indicates that the number of listed companies, legal and regulatory provision are inadequate for a degree of portfolio diversification and market capitalization is low compared with other emerging markets.

FDI in Arab markets has been volatile due to financial and political transformations. Previous studies show that stock markets tend to develop as FDI increase. Singh (1997) found that economic growth promotes stock market development and that stock markets contributed significantly to liberalization of emerging countries. Errunza (1983) indicates that foreign capital inflows have positive impact on stock market development. Yartey (2008) argues that FDI promotes stock markets development. Hermes and Lensink (2003) indicated that FDI benefits developed stock markets only. Borensztein et al (1998) find that FDI is important to transfer technology and higher growth only if the host country has significant inventory of human capital. The relation between FDI and trade volume in stock markets did not receive enough attention in the literature. The literature shows that the most important factors to attract FDI are market size, growth rate, cost of labor, government policies and cost of capital. Levine and Zervos (1996, 1998) and Atje and Jovanovic (1993) show that stock markets improvements promote growth dramatically in undeveloped countries.

There has been many research on determinants of financial sector development related to FDI, Garcia and Liu (1999), Demirguc-Kunt and Levine (1996), Yartey and Adjasi (2007), and many others studied the relationship between financial market and macro.

The article employed daily closing price and daily index return data from 2010:12–2013:10 for six countries. The countries are Tunisia, Egypt, Bahrain, Jordan, Kuwait and Saudi Arabia. The date are obtained from the International Financial Corporation (IFC) and Standard and Poor’s (S&P) database. Volume of monthly data are used to determine the short-term relationship between stock market behavior and FDI from 2010:12–2015:06.

We test hypotheses of unit root on FDI and trade volume of stock markets for the six countries. We used the unit root test of Im, on the Augmented Dickey-Fuller (ADF) statistic for each country. By using panel data we can include time fixed effects to control for structural breaks yet allowing for different slopes and lag lengths.

Tables 2 and 3 show the relationship between FDI and trade volume in the six stock markets, uncertainty over what political action of Arab spring explain the volatile relation every 9–12 month period. Variance change significantly over the period of 9–12 month. The results are not surprising, trade volume is auto correlated with FDI. FDI is influenced by movements in the six stock markets.

This article differs from similar studies since it focused on Arab stock markets during the Arab spring. The Random Walk tests used to determine whether stock prices follow a random walk (Fama, 1965; Abumustafa, 2008). An efficient stock market is one in which stock prices adjust quickly to new information, past stock prices can be used to predict future prices. There are three types of market efficiency, the weak form, semi-strong and the strong market efficiency, (Fama, 1970). Many researchers have studied seasonal anomalies in developed markets, (El-Erian and Kumar, 1995) show that these market inefficiencies are one factor that limits the flow of funds into emerging stock markets.

Table 4 shows that all six countries do not reject the null hypothesis at the 5 per cent and 1 per cent levels of significance.

Ariel (1987) show that the stocks returns during the first half of the month are significantly higher than the second half of the month.

Arab spring will continue to have a negative economic and financial impact during 2014 and 2015 on most Arab countries, on the other hand expectation is high for GCC countries especially Saudi Arabia to have stronger growth at the Micro, Micro and financial markets levels. Arab spring has created huge investment opportunities for speculators during the last 4 years and half especially in Egypt.

The statistical result support the economic theory of causality between foreign direct investment and stock market movements in short term. Liquidity provision, speculative trading and premature financial tools are the main reasons for negative performance of most Arab stock markets during Arab spring. In the very short term, Arab stock markets is the best environment for speculators due to extreme volatility most of Arab stock markets have been experiencing during the last 3 years and expected to continue for a couple more years.

It has been the financial system that has historically caused problems for the economy and stock markets in the Arab countries. Arab stock markets remain relatively close to international investors. There are often limits on the amount foreigners that can jointly hold in a company.

Despite signs of renewed investor interest and stability in a couple of Arab countries, Arab spring second wave is expected to be worse than the 2010 one, it is expected that the real crash of stock markets in Arab countries is coming, intense wealth destruction will occur at the first sign of the second wave of Arab spring stock markets will fall sharply, a 90 per cent plunge, investors should be very cautious.