Skip to main content


Swipe to navigate through the articles of this issue


The Predictive Power of Financial Stress on the Financial Markets Dynamics: Hidden Markov Model

Authors: Hayet Soltani, Mouna Boujelbène Abbes

Published in: Journal of Economics and Finance

Login to get access


This study investigates the predictive power of the financial stress on the dynamic of the Middle East and North Africa (MENA) financial market returns from 2007 to 2021. Based on a Quantile Regression, we show that financial stress has highest predictive abilities at the lower quantiles when the market is bearish. Then, we propose a Hidden Markov Model (HMM) based on the transition matrix to understand the relationship between financial stress index and the MENA stock market dynamics. We find that the effect of financial stress on stock market return reveals the persistence of regimes: Bullish state exists and persists, and has the longest conditional expected duration for the majority of MENA markets, except Bahrain, Qatar and Jordan. However, the transition probability from the bullish to the calm regime is too low for the financial market of Bahrain, United Arab Emirates and Egypt. Besides, the estimated mean returns for each regime divulge that the bearish and calm states are more attractive destination for both portfolio managers and investors.

  1. Al-Awadhi AM, Alsaifi K, Al-Awadhi A, Alhammadi S (2020) Death and contagious infectious diseases: Impact of the COVID-19 virus on stock market returns. J Behav Exp Financ 27:100326View Article
  2. Al-Maadid A, Caporale GM, Spagnolo F, Spagnolo N (2020) The impact of business and political news on the GCC stock markets. Res Int Bus Financ 52:101102View Article
  3. Aloui C, Nguyen DK, Njeh H (2012) Assessing the impacts of oil price fluctuations on stock returns in emerging markets. Econ Model 29(6):2686–2695View Article
  4. Apostolakis G, Papadopoulos AP (2014) Financial stress spillovers in advanced economies. J Int Financ Mark Inst Money 32:128–149View Article
  5. Balakrishnan R, Danninger S, Elekdag S, Tytell I (2011) The transmission of financial stress from advanced to emerging economies. Emerg Mark Financ Trade 47(sup2):40–68View Article
  6. Baum LE, Petrie T (1966) Statistical inference for probabilistic functions of finite state Markov chains. Ann Math Stat 37(6):1554–1563View Article
  7. Berger D, Pukthuanthong K (2016) Fragility, stress, and market returns. J Bank Financ 62:152–163View Article
  8. Bloom N (2009) The impact of uncertainty shocks. Econometrica 77(3):623–685View Article
  9. Borio C, Lowe P (2002) Asset Prices, Financial and Monetary Stability: Exploring the Nexus, BIS Working Papers No. 114, July
  10. Chatjuthamard P, Jindahra P, Sarajoti P, Treepongkaruna S (2021) The effect of COVID-19 on the global stock market. Account Finance 61(3):4923–4953View Article
  11. D’haultfœuille X, Givord P (2014) La régression quantile en pratique. Economie et statistique 471(1):85–111View Article
  12. Das D, Kumar SB, Tiwari AK, Shahbaz M, Hasim HM (2018) On the relationship of gold, crude oil, stocks with financial stress: A causality-in-quantiles approach. Financ Res Lett 27:169–174View Article
  13. Duprey T, Klaus B, Peltonen T (2017) Dating systemic financial stress episodes in the EU countries. J Financ Stab 32:30–56View Article
  14. He P, Sun Y, Zhang Y, Li T (2020) COVID–19’s impact on stock prices across different sectors—An event study based on the Chinese stock market. Emerg Mark Financ Trade 56(10):2198–2212View Article
  15. He X, Mishra S, Aman A, Shahbaz M, Razzaq A, Sharif A (2021) The linkage between clean energy stocks and the fluctuations in oil price and financial stress in the US and Europe?. Evidence from QARDL approach. Res Policy 72:102021View Article
  16. Heo W, Rabbani A, Grable JE (2021) An evaluation of the effect of the COVID-19 pandemic on the risk tolerance of financial decision makers. Financ Res Lett 41:101842View Article
  17. Koenker RW, d'Orey V (1987) Algorithm AS 229: Computing regression quantiles. Applied statistics, 383-393
  18. Liu H, Manzoor A, Wang C, Zhang L, Manzoor Z (2020) The COVID-19 outbreak and affected countries stock markets response. Int J Environ Res Public Health 17(8):2800View Article
  19. Mezghani T, Boujelbène-Abbes M (2021) Financial stress effects on financial markets: dynamic connectedness and portfolio hedging. Intl J Emerg Markets
  20. Nguyen N (2017) An analysis and implementation of the hidden Markov model to technology stock prediction. Risks 5(4):62View Article
  21. Nusair SA, Al-Khasawneh JA (2018) Oil price shocks and stock market returns of the GCC countries: empirical evidence from quantile regression analysis. Econ Chang Restruct 51(4):339–372View Article
  22. Okorie DI, Lin B (2021) Stock markets and the COVID-19 fractal contagion effects. Financ Res Lett 38:101640View Article
  23. Prajogo A (2011) Analyzing patterns in the equity market: ETF investor sentiment and corporate cash holding, ph.D. Thesis, The Department of Operations Research and Financial Engineering, Princeton University, pp. 49-63
  24. Salisu AA, Akanni LO (2020) Constructing a global fear index for the COVID-19 pandemic. Emerg Mark Financ Trade 56(10):2310–2331View Article
  25. Salisu AA, Vo XV (2020) Predicting stock returns in the presence of COVID-19 pandemic: The role of health news. Int Rev Financ Anal 71:101546View Article
  26. Sharif A, Aloui C, Yarovaya L (2020) COVID-19 pandemic, oil prices, stock market, geopolitical risk and policy uncertainty nexus in the US economy: Fresh evidence from the wavelet-based approach. Int Rev Financ Anal 70:101496View Article
  27. Soltani H, Abbes MB, Aloulou A (2021) Investigating the Relationship Between Financial Stress Index and MENA Stock Markets Performance. Intl J Finance Bank Res 7(5):111View Article
  28. Stolbov M, Shchepeleva M (2016) Financial stress in emerging markets: Patterns, real effects, and cross-country spillovers. Rev Dev Finance 6(1):71–81View Article
  29. Sum, V. and Brown, K. (2014) ‘Dynamic effects of financial stress on the US real estate market performance’, J Econo Business, Elsevier Vol. 75, No. C, pp.80–92
  30. Trichilli Y, Abbes MB, Masmoudi A (2020) Predicting the effect of Googling investor sentiment on Islamic stock market returns: A five-state hidden Markov model. Intl J Islamic Middle East Finance Manag
  31. Zayati M, Gaaliche M (2014) Les déterminants d'instabilité financière: Un essai de détection à partir de l'Indice de Stress Financier [Determinants of financial instability: an attempt at detection by the Financial Stress Index]. Int J Innov Appl Stud 6(1):48
  32. Zhang H, Wang P (2021) Does Bitcoin or gold react to financial stress alike? Evidence from the US and China. Int Rev Econ Financ 71:629–648View Article
  33. Zhu W, Yang J, Lv H, Zhuang M (2021) Pandemic uncertainty and socially responsible investments. Front Public Health 9:144
The Predictive Power of Financial Stress on the Financial Markets Dynamics: Hidden Markov Model
Hayet Soltani
Mouna Boujelbène Abbes
Publication date
Springer US
Published in
Journal of Economics and Finance
Print ISSN: 1055-0925
Electronic ISSN: 1938-9744

Premium Partner