Economic regimes and stock market performance in Nigeria: Evidence from regime switching model

Aliyu, Shehu Usman Rano and Aminu, Abubakar Wambai (2018): Economic regimes and stock market performance in Nigeria: Evidence from regime switching model.

Abstract

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Markov switching model, bull and bear markets, stock returns, exchange rate, volatility
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C53 - Forecasting and Prediction Methods ; Simulation Methods; F - International Economics > F3 - International Finance > F36 - Financial Aspects of Economic Integration; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets

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