Economic regimes and stock market performance in Nigeria: Evidence from regime switching model
Shehu Usman Rano Aliyu and
Abubakar Wambai Aminu
MPRA Paper from University Library of Munich, Germany
The paper analyzes volatility spillover between exchange rate and stock market in “turbulent” and “calm”, otherwise, “bull” and “bear” periods in the Nigerian stock market from 1st January, 2010 to 31st December, 2017 using a regime heteroskedastic Markov switching model in line with Kim (1993). The approach allows regime shift in both mean and variance of a series where failure to allow for regime shift leads to an overstatement of persistence of the variance, Lamoureuex and Lastrapes (1990). Results from preliminary investigations reveal that both stock returns and exchange rate series are characterized with non- normal distribution, presence of unit root and ARCH effects. Further, evidence of two regimes, that is, bear and bull markets, was established with higher persistence, that is, high transition probabilities, in the bear as against the bull market at 0.9455 and 0.8686, respectively. However, duration of stay in the regime is higher in the bull market (regime 2) than in the bear market (regime 1) at 5958.12 days and 18.406 days, respectively. Further, analysis of volatility spillover between exchange rate and stock returns reveals that returns increases due to appreciation in the exchange rate in the bear market and diminishes in response to exchange rate depreciation in the bull market. Thus, adverse economic conditions leading to exchange rate volatility diminishes stock market returns by increasing investors’ risk perception, especially in the bull market. No doubt, the findings are important to investors, regulators and monetary authorities.
Keywords: Markov switching model; bull and bear markets; stock returns; exchange rate; volatility (search for similar items in EconPapers)
JEL-codes: C53 F36 G12 G15 (search for similar items in EconPapers)
Date: 2018-07-05, Revised 2018-10-03
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:91430
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