The purpose of this paper is to investigate how shocks in bullish and bearish sentiment markets in the USA affect the returns of markets in the MENA region, as well as the sentiments of MENA investors. The study utilizes a thorough theoretical framework to analyze the structural shocks in the sentiment market and their spillover effects. To examine the spillover effect, various methodologies are applied as constructing sentiment indices using principal component analysis and Structural Vector Autoregression model and finally using Markov switching model.
Findings indicate that shocks in the USA sentiment market have significant impact on MENA region returns and sentiment markets. Bullish sentiment shocks in the USA markets trigger capital outflows from MENA markets and hence have a significant negative impact on MENA markets returns and Positive impact on MENA sentiment Markets. Conversely, bearish sentiment shocks in the USA results in increased capital inflows into MENA markets and hence have significant positive impact on MENA markets returns and Sentiment markets. The findings revealed significant but differing impacts of bearish and bullish sentiment shocks from the USA on sentiment in MENA markets. The study emphasizes the importance of coordinated policy responses from MENA policymakers and regulators to mitigate the adverse effects of these external shocks. It also provides valuable insights into how market sentiment from the USA influences the MENA region, serving as a foundation for policymakers and researchers to explore and address this significant issue further.