Rolling the Greenflation Dice: Will MENA Stock Markets Win or Lose Liquidity?

This study investigates the impact of greenflation—the inflationary pressures from environmental policies—on stock market liquidity in the MENA region. Using daily market data from 823 publicly listed firms across 12 MENA countries from November 29, 2019 to December 29, 2023, we assess market liquidity through its tightness and depth dimensions. Our findings indicate that greenflation enhances market liquidity by reducing transaction costs and increasing market depth, driven by growing investor demand for sustainable assets. The impact, however, varies across regions: Middle Eastern markets show significant liquidity improvements, while North African markets exhibit a more limited response. Furthermore, the post-pandemic COVID-19 period has amplified greenflation’s positive effects, which indicates increased investments in sustainable projects. These findings highlight the potential of greenflation to advance market liquidity and sustainability goals.