Abstract

This paper utilizes the Kalman filter approach to examine the impact of the Iraq war on the country betas of 11 equity markets in the MENA region. The Kalman filter model allows the country beta to vary over time conditional on the interaction with Iraq war dummy in the transition equation. The results show that the Iraq war has a positive impact on the country betas of all the MENA countries under study but statistically significant for Egypt, Morocco, Tunisia, and Kuwait. The Iraq war has created a sudden shift in the time paths of the country betas, which reflected in a significant structural break and a dramatic increase of these equity market risks in the region. Although the impact of this geopolitical event is found to be limited to four markets in the region, the results correspond to the impact of the geopolitical events like the Iraq war on equity markets.

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