## _wp07179

## Source details

**Canonical URL:** [_wp07179](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2007/_wp07179.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2007/_wp07179.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2007/_wp07179.pdf.json)

---

### I. Introduction and background
- Context:
  - Developed markets recovered from the technology bubble; emerging markets saw large inflows driving up stock prices.
  - Middle East and Central Asia: several economies established or enhanced equity markets, partly boosted by oil revenues.
- Egypt-specific context:
  - Alexandria and Cairo stock exchanges founded in 1883 and 1903; joined into the Cairo and Alexandria Stock Exchanges (CASE) about 10 years before the study.
  - Since 2002, delisting of about 500 nontraded companies; remaining ~600 companies include about half with very low to negligible turnover.
  - Stock market capitalization rose from 31 percent to 80 percent of GDP over the same period.
  - CASE 30: major index combining the 30 most liquid companies with a minimum of 15 percent free float.
- Research objectives:
  - Two angles: (i) performance — assess evidence of speculative bubbles vs. fundamentals; (ii) portfolio diversification — analyze short- and long-run comovement with other equity markets and changes over time (with September 11, 2001 as a structural break point).
  - Methods: valuation measures, variance bounds test, cointegration tests, analysis of correlations and cointegration with other markets.
- Key preview findings:
  - Some limited evidence of overvaluation in the last three years, but improved economic environment could support continued performance.
  - Correlations of CASE 30 with most other markets rose dramatically between the two periods; return correlations increased with some Arab markets.
  - Bilateral cointegration evidence is weak — scope for longer-run portfolio diversification remains.
  - In multivariate analysis, Egypt appears cointegrated with—but not influenced by—other Arab stock markets.

### II. Link between Egyptian share prices and fundamentals
- Aggregate movement and sample:
  - CASE 30 index rose by more than 750 percent in local currency during the last 9 years notwithstanding the severe correction in early 2006.
  - Sample period for monthly analysis: June 2001 to December 2006 (constrained by availability of dividend yield data).
- Standard indicators — descriptive evidence:
  - Price-to-earnings (P/E) ratio:
    - P/E ratio was flat for a few years, began rising in 2003, and reached a value of about 24 at end-2006, which is almost twice its historical average.
    - Composition effects: share of IT and media and telecommunication sector in CASE 30 tripled from 10 percent in the first half of 2002 to 30 percent in the second half of 2006; this increase occurred mainly in 2006 and does not fully explain the P/E increase between 2003 and 2005.
  - Dividend yield (DY):
    - Dividend yield fell continuously since end-2001 until the February 2006 correction.
    - Low point: 2.4 percent in January 2006.
    - Historical average dividend yield: 7.8 percent; post-decline the index remained at about one third of this historical average.
    - After a short rebound during the early-2006 correction, dividend yield remained broadly flat while equity prices resumed strong growth, indicating that, starting in the second half of 2006, earnings grew in line with the index.
  - Price volatility:
    - Standard deviation of daily returns for January 2002 to December 2006: volatility increased at the beginning of 2003, doubled before the February 2006 correction, and showed an even more pronounced increase in early 2005.
    - Conclusion: higher volatility of daily returns does not provide conclusive evidence for a speculative bubble.
  - Liquidity, money and credit:
    - No apparent relationship between CASE 30 and broad money (M2).
    - Some additional private sector credit in 2005–06 could have been channeled to the stock market, but the growth rates involved are small compared to credit booms elsewhere.
    - Conclusion: most of the stock market acceleration appears driven by foreign (as opposed to domestic) liquidity.

### III. Summary statistics and variance bounds (Gordon growth fundamentals)
- Summary statistics and visual patterns:
  - Visual inspection: until mid-2004 price and dividend indices remain fairly aligned; starting Q2 2004 they diverge due to a much steeper increase of the price index.
  - Sample span for CASE/dividend analysis: 2001–06.
  - Reported peak value for the CASE 30 Index: 1336.68 (Peak date Jan-06).
- Gordon growth fundamentals construction:
  - Fundamental price: P_t^* = D_{t-1} * (1+g) / (i - g) where i = average CASE 30 real return (whole period) and g = average growth of real cash dividends (whole period).
  - Monthly fundamental values transformed back into nominal variables using the WPI and normalized to create a monthly fundamental values index.
  - Descriptive pattern: fundamental index shows slight undervaluation from June 2001 to mid-2004, followed by increasing distance between actual CASE 30 index and fundamentals peaking in January 2006.
- Variance bounds (excess volatility) test:
  - F-test comparing variances of actual prices and fundamental values: test statistic 7.95.
  - Null rejected at the 1-percent level → provides some evidence for excess volatility in the Egyptian stock market.
- Model caveats:
  - Gordon model assumes constant real discount and expected real dividend growth rates.
  - The assumption that price index and dividends are (trend-)stationary is questionable and limits inference.

### IV. Cointegration tests and international linkages
- Cointegration methodology and interpretation:
  - Asset pricing relation motivates cointegration: if price and dividends are I(1), cointegration indicates a long-run stationary relationship (absence of a bubble); absence of cointegration could indicate a nonstationary bubble term b_t, but also may reflect specification issues or short sample.
  - Statistical model: general cointegrated VAR(k) in error-correction form with tX = [P_t, D_t]'.
  - Unit-root testing: conventional tests (ADF, Phillips-Perron) applied; only one model (ADF with trend) rejected unit root in level of dividend index at the 5-percent level.
  - Empirical strategy: models estimated for (i) full period May 2001–December 2006; (ii) Period I (until May 2004); (iii) Period II (June 2004–Dec 2006).
- Cointegration findings (domestic price/dividend):
  - Full sample: limited evidence of one cointegrating relationship; stronger in parsimonious models but those models display residual autocorrelation.
  - Period I (until May 2004): evidence for one cointegrating relationship — stock price driven by same common trend as dividend index.
  - Period II (from June 2004): cointegration evidence sensitive to lag specification; parsimonious models indicate one cointegrating relationship but suffer residual autocorrelation (significant at the 7 percent level); models with more lags consistent with residual assumptions show weaker cointegration.
  - Overall: cointegration results corroborate, to some extent, excess volatility evidence but are less conclusive given short subperiod spans (between 30 and 35 months) and borderline non-stationarity of dividend series.
- International linkages — data and short-run statistics:
  - Weekly stock indices from Datastream: January 6, 1998 through December 26, 2006 — total 469 observations.
  - Subsamples: Period I = 192 observations (Jan 6, 1998–Sep 4, 2001); Period II = 277 observations (Sep 11, 2001–Dec 26, 2006).
  - Short-run behavior:
    - Egyptian index lost about 33 percent between February and June 2006.
    - Over full sample, Egyptian average weekly return: 0.16 percent on a U.S. dollar basis and 0.27 percent on an Egyptian pound basis.
    - Period II average weekly return for Egypt: 0.65/0.75 percent per week (USD/EGP), exceeding most other markets in sample.
    - Egypt among the most risky investments by standard deviation of returns; Sharpe ratio not significantly higher than peers.
    - Short-run correlations substantially higher in Period II than Period I across almost all country-currency pairings; especially high with Arab and Emerging Market economies in local-currency terms in Period II.
- Bilateral and multilateral cointegration:
  - Bilateral cointegration: very weak support between Egypt and other markets; solid evidence only with Italy (driven by Period I); Mexico and Pakistan borderline significant for full sample only; no cointegration with Saudi Arabia or Jordan.
  - Multilateral cointegration (five Middle East indices: Egypt, Jordan, Kuwait, Lebanon, Saudi Arabia):
    - Some evidence for regional cointegration over the whole sample.
    - Splitting the sample: regional markets not cointegrated in Period I and only weakly so in Period II.
    - Full sample: exclusion of Saudi and Jordan from cointegrating relationship cannot be rejected (p-value 0.374; 0.493 after Bartlett correction).
    - Full sample: excluding Kuwaiti index and imposing weak exogeneity for Egyptian index cannot be rejected at the 10-percent level.
    - Second period: Kuwaiti index can be excluded; joint zero restrictions on adjustment coefficients not rejected (p-value 0.601 with 5 degrees of freedom). Only Jordan adjusts to disequilibrium in the long-run relationship among the five indices.
  - Interpretation: short-term co-movement increased markedly after September 11, 2001, but long-run bilateral cointegration evidence remains weak; Egypt continues to offer scope for long-run portfolio diversification despite higher short-run correlations in Period II.

### V. Conclusions and policy recommendations
- Overall assessment:
  - Evidence linking Egyptian stock index to fundamentals is mixed:
    - Indicators pointing to some overvaluation in second half of sample: P/E ratio and variance bounds test (excess volatility).
    - Other indicators (return volatility, dividend yields) not conclusive.
    - Cointegration offers weak evidence regarding a bubble; tests limited by short series span and dividend stationarity concerns.
  - Small overvaluation of the Egyptian stock market—especially in early 2006—cannot be rejected, but evidence is less clear-cut than for some other countries/episodes.
- Portfolio diversification implications:
  - Short-term correlations rose sharply after September 11, 2001 (likely influenced by worldwide liquidity and high oil prices).
  - Long-run bilateral cointegration is weak → Egypt remains somewhat decoupled in the long run and offers diversification potential.
- Explicit policy recommendations:
  - Continue business-environment improvements and investment incentives (including further privatizations) to align corporate profits with rapid stock market growth.
  - Enhance broad public benefits from financial boom and prevent drastic equity market corrections by:
    - Enhancing trading volume and market transparency; further downsizing the CASE by delisting rarely traded stocks.
    - Implementing a supervised secondary (small cap) market at CASE to improve SME access to finance and market segmentation.
    - Developing securitized and derivative products to improve corporate risk management for firms without international finance access.
    - Enhancing accounting standards quality and enforcing frequent disclosure of investor information by listed companies to educate investor base.
    - Strengthening data systems for timely dissemination of financial information; potential role for ICT parks to support CASE.
    - Reinforcing supervisory framework implemented by Central Bank of Egypt (CBE) to build a more resilient banking system, encourage lending and investment positions away from high-yield government debt.
    - Continued cooperation and information exchange among CASE, the Capital Markets Authority, and the CBE to enable banks’ balance-sheet analysis, risk-based prudential limits on banks’ portfolio composition, and sophisticated stress testing methodology.
- Further research:
  - Comparative studies of stock markets across Middle Eastern emerging economies focusing on institutional issues recommended.

*Source: _wp07179 - References (PDF).*

### References..............................................................................................................

### References

### I. Introduction and Background
- Global and regional context:
  - Developed markets recovered from the technology bubble; emerging markets saw large inflows driving up stock prices.
  - Selected markets experienced major corrections; some temporary, others more pronounced.
  - In the Middle East and Central Asia, several economies established or enhanced equity markets, partly boosted by oil revenues.
- Egypt-specific background:
  - Alexandria and Cairo stock exchanges founded in 1883 and 1903; joined into the Cairo and Alexandria Stock Exchanges (CASE) about 10 years before the study.
  - Since 2002, delisting of about 500 nontraded companies; remaining ~600 companies include about half with very low to negligible turnover.
  - Stock market capitalization rose from 31 percent to 80 percent of GDP over the same period.
  - CASE 30: major index combining the 30 most liquid companies with a minimum of 15 percent free float.
- Recent performance and investor attention:
  - Equity markets across the Middle East region boomed in 2003–05, experienced strong corrections in early 2006, and struggled thereafter; Egyptian market recovered rather swiftly.
  - At its highest point during the last nine years, in February 2006, the Egyptian stock market index was almost 12 times as high as at the low point in March 2003—in less than three years.
- Research objectives and structure:
  - Two angles: (i) performance — assess evidence of speculative bubbles vs. fundamentals; (ii) portfolio diversification — analyze short- and long-run comovement with other equity markets and changes over time (with September 11, 2001 as a structural break point).
  - Methods: valuation measures, variance bounds test, cointegration tests, analysis of correlations and cointegration with other markets.
  - Key findings preview:
    - Some limited evidence of overvaluation in the last three years, but improved economic environment could support continued performance.
    - Correlations of CASE 30 with most other markets rose dramatically between the two periods; return correlations increased with some Arab markets.
    - Bilateral cointegration evidence is weak — scope for longer-run portfolio diversification remains.
    - In multivariate analysis, Egypt appears cointegrated with—but not influenced by—other Arab stock markets.

### II. How Strong Is the Link Between Egyptian Share Prices and Fundamentals?
- Aggregate movement:
  - CASE 30 index rose by more than 750 percent in local currency during the last 9 years notwithstanding the severe correction in early 2006.
- Approaches to detect bubbles:
  - Literature provides tests for bubble premia, excess volatility (variance bounds), and non-stationarity/cointegration; this paper applies excess volatility tests and cointegration tests using fundamentals derived from the dividend discount method.
  - Applicability depends on stationarity: excess volatility test assumes (trend-)stationarity; cointegration approach meaningful in non-stationary context.

- A. Data
  - Series used: monthly closing prices of CASE 30 price index, corresponding dividend yields and price-to-earnings ratios.
  - Additional macro data: broad money, Egyptian wholesale price index (WPI), and domestic credit growth from the IMF’s International Financial Statistics database.
  - Sample period: June 2001 to December 2006 (constrained by availability of dividend yield data).

- B. Standard Indicators — Descriptive Evidence
  - Price-to-earnings (P/E) ratio:
    - P/E ratio was flat for a few years, began rising in 2003, and reached a value of about 24 at end-2006, which is almost twice its historical average.
    - Compared to other economies, the evidence for overvaluation from P/E is less strong; P/E ratios in other markets before 1998 corrections and after are noted in the literature but not asserted as direct comparators here.
    - Composition effects: share of IT and media and telecommunication sector in CASE 30 tripled from 10 percent in the first half of 2002 to 30 percent in the second half of 2006; however, this increase occurred mainly in 2006 and does not fully explain the P/E increase between 2003 and 2005.
  - Dividend yield (DY):
    - Dividend yield fell continuously since end-2001 until the February 2006 correction.
    - Low point: 2.4 percent in January 2006.
    - Historical average dividend yield: 7.8 percent; post-decline the index remained at about one third of this historical average.
    - After a short rebound during the early-2006 correction, dividend yield remained broadly flat while equity prices resumed strong growth, indicating that, starting in the second half of 2006, earnings grew in line with the index.
  - Price volatility:
    - Investigated via standard deviation of daily returns of CASE 30 for January 2002 to December 2006.
    - After a sudden increase in price volatility at the beginning of 2003, volatility abated somewhat.
    - The February 2006 correction was preceded by a doubling of the standard deviation; however, an even more pronounced increase occurred in early 2005, when the correction was a year away.
    - Conclusion: higher volatility of daily returns does not provide conclusive evidence for a speculative bubble.
  - Liquidity, money and credit:
    - Checked relationship between CASE 30 movements and growth of broad money (M2) and credit to private sector.
    - Finding: no apparent relationship between CASE 30 and broad money.
    - Some additional private sector credit in 2005–06 could have been channeled to the stock market, but the growth rates involved are small compared to credit booms elsewhere.
    - Conclusion: most of the stock market acceleration appears driven by foreign (as opposed to domestic) liquidity.

- C. Variance Bounds Test — Background and Methodology
  - Theory:
    - Following Shiller (1981), variance bounds compare variance of actual stock prices (Pt) with variance of fundamental prices (Pt*), where fundamentals are the present value of actual future discounted dividends: Pt* = sum_{i=1 to ∞} Dt+i / (1 + r)^i.
    - With Pt = Pt* + ut and forecast error ut uncorrelated with Pt*, inequality var(Pt) ≤ var(Pt*) should hold in an efficient market; violation may indicate excess volatility or speculative bubbles.
    - Statistical applicability: test assumes the actual price and dividend series are (trend-)stationary; otherwise comparing variances is futile.
  - Sample construction and approach:
    - Monthly closing prices and monthly dividend yields of CASE 30 used; indices normalized (June 2001 = 100) and transformed into real variables using the monthly Egyptian WPI.
    - Methodology broadly follows Brooks and Katsaris (2003).

### Key empirical findings (summarized)
- Valuation indicators:
  - CASE 30 P/E ≈ 24 at end-2006 (almost twice historical average).
  - Dividend yield low point: 2.4 percent in January 2006; historical average 7.8 percent.
- Price movements and volatility:
  - CASE 30 rose more than 750 percent over the last 9 years (local currency) despite a correction in early 2006.
  - Volatility increased markedly at several points (early 2003, early 2005, pre-February 2006), but volatility patterns alone do not confirm a speculative bubble.
- Liquidity drivers:
  - Little relation with broad money growth; some private credit growth in 2005–06 but small in magnitude relative to typical credit booms.
  - Stock market acceleration likely driven by foreign liquidity.
- Tests and overall inference:
  - Authors report some limited evidence of overvaluation in the last three years, but improved economic fundamentals could support continued performance.
  - Cointegration and excess volatility tests are applied (variance bounds and cointegration approaches); applicability depends on stationarity properties of series.

*Source: _wp07179 - References (PDF).*

### 2004. Summary statistics about the CASE 30 index and the constructed dividend index are

### _wp07179 - 2004. Summary statistics about the CASE 30 index and the constructed dividend index are

### Summary statistics (Table 1 and descriptive)
- Table 1. Egypt: Summary Statistics for CASE 30 and Dividend Indices, 2001–06 (as reported)
  - CASE 30 IndexDividend Index
  - NominalRealNominalRealNominalReal
  - Mean439.73.0203.61.5267.81.9
  - Standard deviation404.62.5106.50.6143.50.8
  - Peak value 1336.68.9510.93.4704.24.6
  - Peak dateJan-06Jan-06Feb-06Feb-06Apr-07Mar-07
- Visual inspection of normalized indices (Figure 2): until mid-2004 price and dividend indices remain fairly aligned; starting Q2 2004 they diverge due to a much steeper increase of the price index.
- Sample span referenced for CASE/dividend analysis: 2001–06.

### Gordon growth fundamentals and excess volatility
- Fundamental prices constructed using the Gordon growth model:
  - P_t^* = D_{t-1} * (1+g) / (i - g)  (model specified in text as equation (4))
  - i = average CASE 30 real return (whole period)
  - g = average growth of real cash dividends (whole period)
  - Monthly fundamental values transformed back into nominal variables using the WPI and normalized to create a monthly fundamental values index.
- Descriptive pattern: fundamental index shows slight undervaluation from June 2001 to mid-2004, followed by increasing distance between actual CASE 30 index and fundamentals peaking in January 2006.
- F-test comparing variances of actual prices and fundamental values:
  - Test statistic: 7.95
  - Null rejected at the 1-percent level → provides some evidence for excess volatility in the Egyptian stock market.
- Model caveats highlighted:
  - Gordon model assumes constant real discount and expected real dividend growth rates.
  - Model assumption that price index and dividends are (trend-)stationary is questionable.

### Cointegration tests: methodology and interpretation
- Asset pricing relation (equation (5)) used to motivate cointegration: P_t = sum_{i=1}^\infty [E_t(D_{t+i})/(1+r)^i] + b_t, with b_t = E_t(b_{t+1})/(1+r) (bubble term).
- Cointegration approach rationale:
  - If price and dividends are I(1), cointegration indicates a long-run stationary relationship (absence of a bubble).
  - Absence of cointegration could indicate a nonstationary bubble term b_t, but also may be due to specification issues or short sample.
- Statistical model: general cointegrated VAR(k) in error-correction form (equation (6)) with tX = [P_t, D_t]'.
- Unit-root testing:
  - Conventional tests (ADF, Phillips-Perron) applied; only one model (ADF with trend) rejected unit root in level of dividend index at the 5-percent level. First differences showed no unit-root indications. Results subject to short-sample criticisms.
- Empirical strategy:
  - Models estimated for (i) full period May 2001–December 2006; (ii) Period I (until May 2004); (iii) Period II (June 2004–Dec 2006).
- Cointegration findings (summary):
  - Full sample (Panel A): limited evidence of one cointegrating relationship; evidence stronger in models with fewer lags but those models display residual autocorrelation. CASE 30 index appears weakly exogenous (dividend yields driven mainly by denominator = stock prices).
  - Period I (until May 2004, Panel B): evidence for one cointegrating relationship — stock price driven by same common trend as dividend index.
  - Period II (from June 2004, Panel C): cointegration evidence sensitive to lag specification; parsimonious models indicate one cointegrating relationship but suffer residual autocorrelation (significant at the 7 percent level); models with more lags consistent with residual assumptions show weaker cointegration. Dividend index appears trend-stationary for most models except the one with two lags.
- Overall cointegration conclusion:
  - Cointegration results corroborate, to some extent, excess volatility evidence but are less conclusive. Short sample span per subperiod (between 30 and 35 months) and borderline non-stationarity of dividend series limit effectiveness of tests.

### International linkages: lead/lag, correlations, and regional cointegration
- Data:
  - Weekly stock indices from Datastream, January 6, 1998 through December 26, 2006: total 469 observations.
  - Subsamples: Period I = 192 observations (Jan 6, 1998–Sep 4, 2001); Period II = 277 observations (Sep 11, 2001–Dec 26, 2006).
  - Tuesday indices used; where available S&P IFC index measures in U.S. dollars and local currency.
- Short-run descriptive statistics:
  - Egyptian index lost about 33 percent between February and June 2006 (sell-off reportedly triggered by Gulf-region investor liquidation).
  - Over full sample, Egyptian average weekly return:
    - 0.16 percent on a U.S. dollar basis
    - 0.27 percent on an Egyptian pound basis
  - Period II average weekly return for Egypt: 0.65/0.75 percent per week (USD/EGP), exceeding most other markets in sample.
  - Egypt is among the most risky investments by standard deviation of returns; Sharpe ratio not significantly higher than peers.
  - Short-run correlations (levels and returns) substantially higher in Period II than Period I across almost all country-currency pairings; especially high with Arab and Emerging Market economies in local-currency terms in Period II.
- Bilateral cointegration (Table 5, Panel A):
  - Very weak support for bilateral cointegration between Egypt and other markets.
  - Solid evidence only with Italy (driven by Period I).
  - Mexico and Pakistan borderline significant for full sample only.
  - No cointegration with Saudi Arabia or Jordan.
- Multilateral cointegration (Table 5, Panel B):
  - VAR with five Middle East indices (Egypt, Jordan, Kuwait, Lebanon, Saudi Arabia) — some evidence for regional cointegration over the whole sample.
  - Splitting sample: regional markets not cointegrated in Period I and only weakly so in Period II.
  - Restrictions on cointegration rank to 1 (results summarized in text):
    - Full sample: exclusion of Saudi and Jordan from cointegrating relationship cannot be rejected (p-value 0.374; 0.493 after Bartlett correction).
    - Full sample: excluding Kuwaiti index and imposing weak exogeneity for Egyptian index cannot be rejected at the 10-percent level.
    - Second period: Kuwaiti index can be excluded; joint zero restrictions on adjustment coefficients not rejected (p-value 0.601 with 5 degrees of freedom). Only Jordan adjusts to disequilibrium in long-run relationship among the five indices.
- Interpretation:
  - Short-term co-movement increased markedly after September 11, 2001, but long-run bilateral cointegration evidence remains weak. Egypt continues to offer some scope for long-run portfolio diversification despite higher short-run correlations in Period II.

### Conclusions and policy implications
- Overall assessment:
  - Evidence linking Egyptian stock index to fundamentals is mixed:
    - Indicators pointing to some overvaluation in second half of sample: P/E ratio and variance bounds test (excess volatility).
    - Other indicators (return volatility, dividend yields) not conclusive.
    - Cointegration offers weak evidence of a bubble; tests limited by short series span and dividend stationarity concerns.
  - Small overvaluation of the Egyptian stock market—especially in early 2006—cannot be rejected, but evidence is less clear-cut than for some other countries/episodes.
- Portfolio diversification implications:
  - Short-term correlations rose sharply after September 11, 2001 (likely influenced by worldwide liquidity and high oil prices).
  - Long-run bilateral cointegration is weak → Egypt remains somewhat decoupled in the long run and offers diversification potential.
- Policy recommendations (explicitly stated):
  - Continue business-environment improvements and investment incentives (including further privatizations) to align corporate profits with rapid stock market growth.
  - Enhance broad public benefits from financial boom and prevent drastic equity market corrections by:
    - Enhancing trading volume and market transparency; further downsizing the CASE by delisting rarely traded stocks.
    - Implementing a supervised secondary (small cap) market at CASE to improve SME access to finance and market segmentation.
    - Developing securitized and derivative products to improve corporate risk management for firms without international finance access.
    - Enhancing accounting standards quality and enforcing frequent disclosure of investor information by listed companies to educate investor base.
    - Strengthening data systems for timely dissemination of financial information; potential role for ICT parks to support CASE.
    - Reinforcing supervisory framework implemented by Central Bank of Egypt (CBE) to build a more resilient banking system, encourage lending and investment positions away from high-yield government debt.
    - Continued cooperation and information exchange among CASE, the Capital Markets Authority, and the CBE to enable banks’ balance-sheet analysis, risk-based prudential limits on banks’ portfolio composition, and sophisticated stress testing methodology.
- Further research:
  - Comparative studies of stock markets across Middle Eastern emerging economies focusing on institutional issues recommended.

*Sources: CASE; and IMF staff calculations.*

### REFERENCES

### REFERENCES

### Cited works

- Allen, F., and D. Gale, 2003, “Asset price bubbles and stock market interlinkages” in Asset price bubbles, ed. by W.C. Hunter, G. G. Kaufman, and M. Pomerleano (Cambridge: MIT Press).
- Billmeier, A., and I. Massa, 2007, “What Drives Stock Market Development in the Middle East and Central Asia—Institutions, Remittances, or Natural Resources?” forthcoming as IMF Working Paper (Washington: International Monetary Fund).
- Blanchard, O., and M. Watson, 1982, “Bubbles, Rational Expectations, and Financial Markets” in Crises in the Economic and Financial Structure, ed. by P. Wachter (Lexington: Lexington Books).
- Brooks, C., and A. Katsaris, 2003, “Rational Speculative Bubbles: An Empirical Investigation of the London Stock Exchange,” Bulletin of Economic Research, Vol. 55(4), pp. 319–346.
- Diba, B. T, and H. I. Grossman, 1988a, “The Theory of rational bubbles in stock prices,” The Economic Journal, Vol. 98, pp. 746–754.
- ——, 1988b, “Explosive Rational Bubbles in Stock Prices?” American Economic Review, Vol. 78, pp. 520–530.
- Gordon, M. J., 1962, The Investment, Financing, and Valuation of the Corporation (Homewood: Richard D. Erwin).
- Johansen, S., 1991, “Estimation and Hypothesis Testing of Cointegrating Vectors in Gaussian Vector Autoregressive Models,” Econometrica, Vol. 59, pp. 1551–1580.
- ——, 1996, Likelihood-Based Inference in Cointegrated Vector Autoregressive Models, 2nd printing (Oxford: Oxford University Press).
- ——, 2000, “A Bartlett Correction Factor for tests on the cointegrating relations,” Econometric Theory, Vol. 16, pp. 740–778.
- ——, 2002, “A Small Sample Correction Of The Test For Cointegrating Rank In The Vector Autoregressive Model,“ Econometrica, Vol. 70, pp. 1929–1961.
- Kindleberger, C., 1992, “Bubbles,” in The New Palgrave Dictionary of Money and Finance ed. by P. Newman, M. Milgate, and J. Eatwell (London: Macmillan).
- Kleidon, A. W., 1986, “Variance bounds tests and stock price valuation models,” Journal of Political Economy, Vol. 94, pp. 953–1001.
- Marsh, T., and R. Merton, 1986, “Dividend Variability and Variance Bounds Tests for the Rationality of Stock Market Prices,” American Economic Review, Vol. 76, pp. 483–498.
- Organization for Economic Co-operation and Development (OECD), 1998, Economic Outlook No. 64 (Paris: OECD).
- Saadi-Sedik, T., and M. Petri, 2006, “The Jordanian Stock Market—Should You Invest in It for Risk Diversification or Performance?” IMF Working Paper No. 06/187 (Washington: International Monetary Fund).
- Shiller, R. J., 1981, “Do Stock Prices Move Too Much to Be Justified By Subsequent Changes in Dividends?” American Economic Review, Vol. 71, pp. 421–436.
- Tirole, J., 1985, “Asset Bubbles and Overlapping Generations,” Econometrica, Vol. 53, pp. 1499–1528.
- Topol, R., 1991, “Bubbles and Volatility of Stock Prices: Effect of Mimetic Contagion,” The Economic Journal, Vol. 101, pp. 786–800.

*Source: _wp07179 - REFERENCES*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2007/_wp07179.pdf_