The desire to increase investor interest in emerging markets has motivated many studies of return and risk characteristics of equity prices in these markets. Using data from January 1999 to December 2002, we examine the dynamic relationships between oil, currency, and stock prices in the four major markets in the Middle East. Three of the four are highly correlated with the major stock markets. The potential for diversifying in Middle East markets is limited. The Egyptian and Jordanian markets, on one hand, and the Israeli and Saudi markets, on the other, are marginally integrated. While Israeli shekels significantly explain their equity prices, crude oil futures prices fairly explain oil‐rich Saudi and Egyptian equity prices. We conclude that it takes a long time for crude oil futures prices to reach equilibrium with stock prices in Israel when there is a shock to the system. However, it takes relatively a short time for crude spot oil prices and currency price to reach equilibrium with stock prices when there is a shock in the system of Saudi Arabia or Egypt. Our results suggest that, in the short and long term, investor decisions in these markets are influenced by oil and currency prices.
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