Modeling the Sub-Saharan financial markets using the GARCH models (volatility transmission and the influence of exchange rate) (Botswana, Kenya, Nigeria, South Africa, Zimbabwe)

Several studies have concluded that market volatility, integration, and volatility transmission have recently increased. Most recent studies found equity markets to be interlinked. The cause for this increase is attributed to advanced communication system and information technology, globalization and increasing international trades, trade blocks, deregulation of international financial markets, and exchange rates volatility. Most available and current research has concentrated on North American, European, and Asian financial markets; this study expanded available literature by examining Sub-Saharan financial markets.; The purpose was to investigate the influence of exchange rate volatility on Sub-Saharan stock returns. The transmission of volatility and correlation between the countries were investigated. Also examined was the nature of transmission of stock return volatility from the United States and Great Britain into Sub-Saharan financial markets. The study concentrated on five Sub-Saharan African economies: Botswana, Kenya, Nigeria, South Africa, and Zimbabwe.; All data used were secondary. The daily data observation period was January 1998--April 2004. To investigate the relationship among the stock market returns of the five countries, the Pearson correlation test was used. The Generalized Autoregressive Conditional Heteroskedastic (GARCH) model was utilized to examine the relationship between the exchange rate volatility and each country's stock return. The Exponential Generalized Autoregressive Conditional Heteroskedastic (EGARCH) model was used to examine the transmission of volatility within studied markets. The Augmented Dickey-Fuller (ADF; unit root) was used to test for stationarity of stock exchange data. Other statistical techniques applied as a residual test (to test the accuracy of the GARCH model) were the Correlogram Squared Residuals, Histogram-Normality Test, and ARCH LM Test. A variance decomposition test was conducted to determine the relative importance of various markets in causing fluctuations in returns.; A relationship was demonstrated between foreign exchange volatility and stock market returns volatility in markets of Botswana, Kenya, Nigeria, and South Africa, but no such relationship in Zimbabwe stock market volatility. The study found no relationships among the five Sub-Saharan financial markets. Analysis of data revealed transmission of volatility among the five Sub-Saharan countries. It was concluded that there is transmission of volatility from financial markets in the United States and Great Britain to markets in five countries studied.