Conditional macroeconomic and stock market volatility under regime switching: Empirical evidence from Africa

Albert A. Agyemang-Badu; Fernando Gallardo Olmedo; José María Mella Márquez; Albert A. Agyemang-Badu; Fernando Gallardo Olmedo; José María Mella Márquez

doi:10.3934/QFE.2024010

Quantitative Finance and Economics

2024, Volume 8, Issue 2: 255-285. doi: 10.3934/QFE.2024010

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Research article

Conditional macroeconomic and stock market volatility under regime switching: Empirical evidence from Africa

1.
Department of Accounting and Finance, Spiritan University College, P. O. Box 111, Ejisu–Ashanti, Ghana
2.
Facultad de Ciencias Económicas y Empresariales, Universidad Autónoma de Madrid, C/Francisco Tomás y Valiente 5, 28049, Madrid, Spain

Received: 30 January 2024 Revised: 05 April 2024 Accepted: 17 April 2024 Published: 26 April 2024
JEL Codes: C34, E44, G15, G10

We used the Markov switching regression model to establish a relationship between the conditional stock market returns and macroeconomic volatilities. Monthly data from thirteen (13) African stock markets and macroeconomic variables (exchange rate, inflation, interest rate, money supply, and crude oil price) from 2003 to 2022 were employed. We confirmed the existence of two distinct regimes: An economic expansion or a "tranquil" state with less volatility and an economic decline or a "crisis" state with high volatility. Our findings indicated that macroeconomic variables significantly affect both expansion and crisis periods. However, the estimated coefficients were more significant in a tranquil than in a crisis state. The findings of the study were consistent with macroeconomic theory and pointed out policy implications.
- stock markets volatility,
- macroeconomic uncertainty,
- African countries,
- Markov switching regression
Citation: Albert A. Agyemang-Badu, Fernando Gallardo Olmedo, José María Mella Márquez. Conditional macroeconomic and stock market volatility under regime switching: Empirical evidence from Africa[J]. Quantitative Finance and Economics, 2024, 8(2): 255-285. doi: 10.3934/QFE.2024010

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Abstract

We used the Markov switching regression model to establish a relationship between the conditional stock market returns and macroeconomic volatilities. Monthly data from thirteen (13) African stock markets and macroeconomic variables (exchange rate, inflation, interest rate, money supply, and crude oil price) from 2003 to 2022 were employed. We confirmed the existence of two distinct regimes: An economic expansion or a "tranquil" state with less volatility and an economic decline or a "crisis" state with high volatility. Our findings indicated that macroeconomic variables significantly affect both expansion and crisis periods. However, the estimated coefficients were more significant in a tranquil than in a crisis state. The findings of the study were consistent with macroeconomic theory and pointed out policy implications.

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