Political uncertainty and stock market volatility in the Middle East and North African (MENA) countries

• The political uncertainty caused by Arab Spring is enormous and unprecedented.
• Using a variety of GARCH models, we examine the impact of this political event on stock market volatility in MENA countries.
• We find that political turmoil has increased stock market volatility, mainly through the Islamic indices.
• There is little evidence to suggest that MENA markets have become more integrated with international markets after the political revolution.

This paper examines the impact of political uncertainty (caused by the civil uprisings in the Arab World i.e., “Arab Spring”) on the volatility of major stock markets in the MENA region. Our main findings are as follows. First, by distinguishing between conventional and Islamic stock market indices, we find that these two groups of investments react heterogeneously to the recent political turmoil. Specifically, we document a significant increase in the volatility of Islamic indices during the period of political unrests whereas the uprisings have had little or no significant effect on the volatility in conventional markets. Such difference is confirmed by further analysis in a multivariate GARCH model. Second, regardless of its impact on volatility, there is little evidence to suggest that MENA markets have become more integrated with international markets after the political revolution. Third, similar results are not found for the benchmark indices which indicate that the changes are the result of political tensions. In general, these results are robust to model specification and consistent with the notion that political uncertainty contributes to financial volatility. Overall, the findings are important in understanding the role of political uncertainty on stock market stability and are of great significance to investors and market regulators.