In the wake of a dramatic political change, such as the so-called “Arab Spring”, the associated ramifications on the stock markets, especially the regional ones, are questionable. This study examines the impact of the Arab spring on the returns and volatility of a financial market in a stable neighboring country. Specifically, we contribute to the extant literature by investigating the spillover effect of the regional turmoil on Dubai Financial Market (DFM). Due to the domino-effect-like political changes, a major Arab Spring event is defined by the shocking regime change in Egypt during the period between the departure of the former and long-lasted Egyptian president Hosni Mubarak on February 11th, 2011, and conducting the parliamentary elections there on November 30th, 2011. Both the volatility and returns of DFM are examined around the identified period. We employ the daily returns of seven indices at DFM for the period between January 1st, 2008 and December 31st, 2012 using GARCH model to analyze the effects of Arab Spring sparking in the region on volatility and returns. Moreover, we use Event Study method to examine the effect of the dramatic political change on the stock market returns. The findings of the study reveal that the volatility of the overall DFM has not been impacted except for two indices at DFM; Transportation and Telecommunications. The results remain robust when TGARCH model is run. Further, the Event Study results suggest that the Arab Spring has not affected the returns of any of the DFM indices during the above period since both the cumulative abnormal returns (CAR) and the cumulative average abnormal returns (CAAR) are insignificant. There are implications to the regulators, the current and potential international and local investors and portfolio managers who are interested in DFM.
An important theme for strategic risk management in the commodity space is the rising likelihood that volatility will increase and cross-asset correlations will weaken from their current cyclical extremes, enhancing the value of commodity allocations as hedges in financial portfolios over the next few years. This outlook spotlights the importance of the expected variances and catalysts that underlie our average price forecasts. We plot the impact of a 10% allocation to commodities in balanced portfolios for 51 countries, variously testing the S&P GSCI, S&P GSCI Enhanced, DJ-UBS, and JPMCC Total Return Indices over the last five years, tracking the effect on both month-to-month and cumulative returns. We also provide charts showing where volatility stands relative to normal for 24 commodities and the rolling path of correlations for the S&P GSCI against 8 regional equity price indices. A table of European producer prices for vegetables shows that food price inflation is slackening on the margin, for now.
Risk managers and policymakers have grown complacent about volatility, which has been depressed across asset classes by the application of trillions of dollars of monetary stimulus. Implied volatility is below normal in 23 of 36 markets in the JPMCCI. Yet, challenges to these easy policies are building in Asia and Europe, as fears about inflation mount. We believe the risk of policy mistakes (fiscal, regulatory, monetary, and trade) is rising worldwide. Other geopolitical uncertainties are also building. The past few weeks have brought a revolution in Tunisia and food riots in Algeria – disturbances which hold low-probability, but high-impact potential for contagion effects in energy through supply disruptions in Africa and the Middle East. At the same time, this week’s high-level discussions between Beijing and Washington on a number of strategic partnerships could contribute to cooling food price inflation and lower global LNG prices, while lifting North American gas prices through increased Chinese investment in US export liquefaction capacity.
Tactical risk managers should have already started moving to harvest gains and preserve capital, especially precious metals producers. Strategic investors and hedgers should use the evolving weakness to initiate or add to positions. We expect S&P GSCI energy total returns to be 22% over the next 12 months. Petroleum will likely lead all other commodity sectors, offering the best overall hedge to inflation. As such, oil-dominated commodity indices will likely beat indices with a lighter energy focus.