Transitory and Permanent Volatility Components: The Case of the Middle East Stock Markets

Recent research has suggested that returns volatility may contain both short-run and long-run components due to the existence of heterogeneous information flows or heterogeneous agents (Andersen and Bollerslev 1997a, 1997b; Müller et al., 1997). This paper investigates the existence of such volatility decomposition in daily index returns data for nine emerging markets in the Middle East region using the permanent-transitory component variance model of Engle and Lee (1993). The existence of a component structure to volatility is supported by the existence of a transitory component to volatility and a permanent volatility that decays over a much longer horizon in three markets in the Middle East, namely Jordan, Oman, and Saudi Arabia. The component model was able to capture all structure within the data for Saudi Arabia on the basis of residual tests. However, some structure in the residuals remains in the Oman and Jordan markets.