Over the past few decades, the degree of financial correlation in cross-border markets has acquired great importance, strengthened by a very important factor of globalisation and the application of an open economy with both developing and developed countries.
The interconnection and financial integration of securities markets promotes capital flows from markets with additional capital to those with scarce capital flows, and this, in turn, leads to efficient allocation of resources.
Moreover, the degree of financial integration enables investors to highlight and discover investment opportunities and diversify the portfolio that allows to reduce risks and escalate profits.
Most Mena (Middle East and North Africa) countries are taking additional steps to privatise their financial systems and liberalise a wide range of their sectors, especially the banking sector.
Since then, the relationship between stock movements in various stock markets such as the Mena region helps investors achieve appropriate decisions about portfolio diversification and risk reduction.
The Mena region has always attracted the attention of international funds and investors because it represents a centre of abundant natural and human resources.
The region includes the major oil-producing countries in the world accounting for 27 per cent of world oil production, most of which are represented by the Arab Gulf countries.
The outbreak of the Covid-19 pandemic has significantly echoed and caused deep financial turmoil in developing and developed stock markets. Equally, it has also raised concerns about the financial stability of many companies around the world. It caused a peculiar tension between managers, investment decisions and the way investment decisions are made due to the prolonged stoppage of the production, investment and trade process in many economies.
While anticipating and measuring the impact of such a large-scale event on financial markets and economies alike, about the repercussions related to the effects of Covid-19 on the degree of financial interconnectedness and dynamic correlations of stock markets in the Mena region.
It turns out the correlation of stocks among the stock markets of the Mena region has increased significantly during the pandemic period, and this may be partly due to the impact of the common and combined shock wave caused by the pandemic.
This concludes that international and local investors have reduced risks and potential by diversifying investment portfolios, and they have decreased during the pandemic compared to before. This in turn would motivate investors to diversify their portfolios across different types of investment categories such as alternative assets, bonds and digital currencies.
Finally, it is important to better understand the dynamic short- and long-term linkages between financial systems in the Mena region to be of great benefit. It will help regional and international investors and policymakers, and thus anticipate the main channels through which a future crisis may affect their economies and take further steps towards implementing more diversified economies and flexible financial systems.
Moreover, the most important is the adoption of advanced portfolio diversification techniques by individual and institutional investors to eliminate biased investment strategies in favour of well-diversified investment portfolios.
* Dr Ammar Jreisat is assistant Professor, programme co-ordinator of master in real estate development and property management, Department of Economics and Finance, College of Business Administration, University of Bahrain.