Regime Switching in Sub-Saharan Frontier Equity Markets - A Case Study of the Ghana Stock Exchange Index

Abstract

We investigated regime switching behaviour of the broad aggregate returns of the Ghana Stock Exchange within the context of frontier markets. The data covered the daily period from January 04, 2011 to March 31, 2017. We made the following findings: (a) there are clear market regimes corresponding to periods of tranquillity and turbulence as demonstrated by the vastly different unconditional volatilities associated with the low and high regimes in the data (b) contrary to investor beliefs, frontier markets are less risky than reported in the popular press and (c) the returns from frontier markets are positively skewed. The regime
switching model employed was compared to the workhorse GARCH(1,1) model used for volatility estimation in finance using the Deviance Information Criteria. In our findings, the MS-GARCH performed better than the GARCH(1,1), confirming recent studies in volatility modeling. The implications of these findings for trading strategies, investment and portfolio choices and risk management have been highlighted. For policymakers this study will provide a counter argument for granting tax exemptions to global investors on the basis of perceived elevated risk in frontier markets.