Analysing Rational Bubbles in African Stock Markets: Evidence from Econophysics Frequency Domain Estimates and DCC MGARCH Model

Adedoyin Isola Lawal (), Ezeikel Oseni, Adel Ahmed, Hosam Alden Riyadh, Mosab I. Tabash and Dominic T. Abaver
Additional contact information
Adedoyin Isola Lawal: Department of Economics, Bowen University, Iwo P.O. Box 284, Nigeria
Ezeikel Oseni: Department of Finance, University of Lagos (UNILAG), Lagos P.O. Box 132, Nigeria
Adel Ahmed: Amity Business School, Amity University Dubai, Dubai International Academic City, Dubai P.O. Box 345019, United Arab Emirates
Hosam Alden Riyadh: Department of Accounting, School of Economics and Business, Telkom University, Bandung 40257, Indonesia
Mosab I. Tabash: Department of Business Administration, College of Business, Al Ain University, Al Ain P.O. Box 64141, United Arab Emirates
Dominic T. Abaver: Department of Laboratory Medicine and Pathology, School of Medicine, Faculty of Medicine and Health Sciences, Walter Sisulu University, Eastern Cape 5117, South Africa

Economies, 2024, vol. 12, issue 8, 1-22

Abstract: The stock market operates on informed decisions based on information gathered from heterogeneous sources, encompassing diverse beliefs, strategies, and knowledge. This study examines the validity of rational bubbles in stock market prices, focusing on eight African stock markets: South Africa, Nigeria, Kenya, Egypt, Morocco, Mauritius, Ghana, and Botswana. Utilizing newly developed econophysics-based unit root tests and the Dynamic Conditional Correlation Multivariate Generalized Autoregressive Conditional Heteroskedasticity (DCC MGARCH) models, the authors analyzed daily data from 1996 to 2022. Our findings indicate that these markets experienced bubbles at various points, often followed by bursts. These bubbles coincided with significant economic changes, suggesting a strong link between stock market behavior and economic growth. For instance, financial crises, political instability, and global economic downturns significantly influenced bubble formation and bursts in these markets. The study reveals that market-specific events, such as regulatory changes and shifts in investor sentiment, also contributed to the occurrence of bubbles. Three key policy options are proposed to address bubbles in the studied markets including, enhancing regulatory frameworks to monitor and mitigate bubble formation, improving financial literacy among investors to promote informed decision-making, and strengthening economic policies to stabilize macroeconomic conditions and reduce vulnerability to external shocks. By implementing these measures, policymakers can enhance market stability and foster sustainable economic growth in African stock markets.

Keywords: bubbles; Africa; stock market; econophysics (search for similar items in EconPapers)
JEL-codes: E F I J O Q (search for similar items in EconPapers)
Date: 2024
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