Abstract:
Sub-Saharan Africa equity markets have been characterised in various
practitioner literature as risky. Unfortunately, not much has been done in
extant academic works to properly provide evidence and support to guide
investor decision-making in the sub-region. Based on this argument,
specifications of various regime switching GARCH models were made with
various tail innovations to study the volatility of the returns of the Ghana,
Kenya, Nigeria and Botswana exchanges using the daily broad market closing
indices. These regime switching models were compared with the single nonswitching
GARCH models using the Deviance Information Criteria (DIC) for
model fit. The study established the dominance of the low volatility regime for
Ghana, Kenya and Nigeria with the high volalitility periods interspersed for
brief times during the sample period. The opposite was found for the
Botswana exchange. The study also established the most and least volatile
months of the exchanges by a process of resampling the daily into monthly
data and finding the average monthly volatility ranking for the various
exchanges. Findings of this study will inform investors in the sub-region
equity markets on the behaviour of risk and how they can strategise their
trading activities to either take advantage of the volatility or avoid losses. For
policymakers, it alerts them of the presence of regimes in the markets and a
reminder of when regulation and/or policy promote equity market activity in
their respective countries.
