Characterisation Of Volatility Of Returns In Equity Markets Of Sub-Saharan Africa

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.