Sectoral interdependence and causal dynamics in Jordanian financial markets: Evidence from benchmark and sectoral indices

Abstract

The study investigates the financial nexus and causal linkages among the Jordanian benchmark index (AMMAN SE General) and its five major sectoral indices, namely the Jordan Banking Index (AMBX), Industry Index (AMIDX), Mining and Extraction Industries Index (AMMEIX), Service Index (AMSX), and Utility and Energy Index (AMUEX). The daily closing values of all selected six indices are considered for the period spanning January 1, 2013, to June 30, 2024. Various advanced econometric techniques such as the Johansen Cointegration test, Vector Error Correction Model (VECM), and Granger Causality are employed to achieve the study’s aim. The findings confirm both long-run equilibrium and short-run dynamics among the Jordanian benchmark and selected sectoral indices. The study results further reveal the presence of significant bidirectional and unidirectional causal relationships among the indices, with AMBX and AMMEIX emerging as pivotal drivers. The study results demonstrate that the Mining and Extraction Index and the Utility and Energy Index negatively impact AMMAN_SE. Conversely, the Banking, Industrial, and Service indices showcase positive effects on the benchmark index. The study highlights the significance of sectoral interdependence for market stability and portfolio diversification. The present study contributes to understanding Jordan’s financial markets, offering insights for investors and regulators to enhance resilience and optimize strategies.