EconPapers    
Economics at your fingertips  
 

Modelling stock return volatility dynamics in selected African markets

Daniel King and Ferdi Botha

Economic Modelling, 2015, vol. 45, issue C, 50-73

Abstract: This paper examines whether accounting for structural changes in the conditional variance process, through the use of Markov-switching models, improves estimates and forecasts of stock return volatility over those of the more conventional single-state (G)ARCH models, within and across selected African markets for the period 2002–2012. In the univariate portion of the paper, the performances of various Markov-switching models are tested against a single-state benchmark model through the use of in-sample goodness-of-fit and predictive ability measures. In the multivariate context, the single-state and Markov-switching models are comparatively assessed according to their usefulness in constructing optimal stock portfolios. Accounting for structural breaks in the conditional variance process, conventional GARCH effects remain important in capturing heteroscedasticity. However, those univariate models including a GARCH term perform comparatively poorly when used for forecasting purposes. In the multivariate study, the use of Markov-switching variance–covariance estimates improves risk-adjusted portfolio returns relative to portfolios constructed using the more conventional single-state models. While there is evidence that some Markov-switching models can provide better forecasts and higher risk-adjusted returns than those models which include GARCH effects, the inability of the simpler Markov-switching models to fully capture heteroscedasticity in the data remains problematic.

Keywords: Stock returns; Volatility; GARCH; Africa (search for similar items in EconPapers)
Date: 2015
References: Add references at CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0264999314004283
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Modelling Stock Return Volatility Dynamics in Selected African Markets (2014) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:45:y:2015:i:c:p:50-73

DOI: 10.1016/j.econmod.2014.11.008

Access Statistics for this article

Economic Modelling is currently edited by S. Hall and P. Pauly

More articles in Economic Modelling from Elsevier
Bibliographic data for series maintained by Catherine Liu (repec@elsevier.com).

 
Page updated 2024-12-28
Handle: RePEc:eee:ecmode:v:45:y:2015:i:c:p:50-73