Title: Stock price synchronicity and its effect on stock market volatility: evidence from the MENA region

Authors: Omar Farooq; Neveen Ahmed; Mohammed Bouaddi

Addresses: School of Business, ADA University, Baku AZ 1008, Azerbaijan ' Management Department, The American University in Cairo, AUC Avenue, P.O. Box 74, New Cairo 11835, Egypt ' Economics Department, The American University in Cairo, AUC Avenue, P.O. Box 74, New Cairo 11835, Egypt

Abstract: This study investigates whether stock price synchronicity contains information regarding future stock market volatility. More specifically, this paper answers three important questions: 1) Does historic stock price synchronicity affect stock market volatility?; 2) If it does, how much of the volatility is explained by synchronicity?; 3) Does the impact of unexpected shocks on stock market volatility depend on historic synchronicity? Using the data from MENA region (Morocco, Tunisia, Egypt, United Arab Emirates, Jordan, Oman, and Bahrain), we document significantly positive relationship between stock price synchronicity and stock market volatility during the period between 2005 and 2010. We show that, whether stocks co-move downward or co-move upward, it causes stock market volatility to go up significantly. Our results are significant across all markets. We also show that synchronous component of volatility can, at times, completely explain stock market volatility. Furthermore, we also show that the impact of unexpected shocks on stock market volatility is an increasing function of stock price synchronicity.

Keywords: stock price synchronicity; stock market volatility; emerging markets.

DOI: 10.1504/AJFA.2018.093042

American Journal of Finance and Accounting, 2018 Vol.5 No.3, pp.276 - 292

Received: 04 Dec 2017
Accepted: 06 Feb 2018
Published online: 04 Jul 2018 *

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