The Unassuming Economist

From a paper by Zaid Tahat:

“This thesis investigates the dynamic linkages among financial, industrial, service, and general
indices of the Amman Stock Exchange (ASE) in Jordan from 2000 to 2020 using a vector
autoregression (VAR) model and by using daily data. The main aim is to provide a
comprehensive understanding of the interrelationships among these key sectors over the 21-year
period. The objectives are to examine both short-term and long-term dynamic linkages, assess
the model’s explanatory power for variations in sector indices, and derive insights for investors
and policymakers.

The study employs a VAR methodology to capture the dynamic interactions among the sector
indices. Daily data on sector indices is analyzed using Granger causality tests, impulse response
functions, and variance decomposition to quantify the linkages.

The findings reveal significant dynamic linkages among ASE sector indices. The VAR model
exhibits high explanatory power, with R-squared and adjusted R-squared values above 99% for
all sectors. Granger causality tests indicate bi-directional causality between the financial and
general indices and between the service and industrial indices. Impulse response functions show
that shocks to each sector have significant effects on the other sectors that persist over several
days. Variance decomposition analysis attributes 27-38% of forecast error variance in each
sector to innovations in other sectors, affirming the importance of intersectoral relationships.
The empirical evidence can inform portfolio diversification and risk management strategies for
investors. For policymakers, the findings underscore the importance of considering spillover
effects in regulatory frameworks governing the financial sector and capital markets.

To mitigate systemic risk and promote stability, policymakers could consider implementing
macroprudential policies such as countercyclical capital buffers, exposure limits, and liquidity
requirements that account for the interconnectedness of sectors. Enhancing transparency through
disclosure requirements and stress testing that incorporate intersectoral linkages could also help
monitor and manage systemic risk. Coordination among regulators overseeing different sectors
may be warranted to address cross-sector vulnerabilities. Overall, a holistic approach that
recognizes the dynamic linkages among sectors is recommended to foster a resilient financial
system.”