Markov regime-switching autoregressive model of stock market returns in Nigeria

Artikel

This study is designed to model and forecast Nigeria's stock market using the AllShare Index (ASI) as a proxy. By employing the Markov regime-switching autore-gressive (MS-AR) model with data from April 2005 to September 2019, the studyanalyzes the stock market volatility in three distinct regimes (accumulation or distri-bution - regime 1; big-move - regime 2; and excess or panic phases - regime 3) ofthe bull and bear periods. Six MS-AR candidate models are estimated and based onthe minimum AIC value, MS(3)-AR(2) is returned as the optimal model among the sixcandidate models. The MS(3)-AR(2) analysis provides evidence of regime-switchingbehaviour in the stock market. The study also shows that only extreme events canswitch the ASI returns from regime 1 to regime 2 and to regime 3, or vice versa. Itfurther specifies an average duration period of 9, 3 and 4 weeks for the accumu-lation/distribution, big-move and excess/panic regimes respectively which is an evi-dence of favorable market for investors to trade. Based on Root Mean Square Errorand Mean Absolute Error, the fitted MS-AR model is adjudged the most appropriateASI returns forecasting model. The study recommends investments in stock across theregimes that are switching between accumulation/distribution and big-move phasesfor promising returns.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Journal: CBN Journal of Applied Statistics ; ISSN: 2476-8472 ; Volume: 11 ; Year: 2020 ; Issue: 2 ; Pages: 65-83 ; Abuja: The Central Bank of Nigeria

Classification and Topics

• Classification: Wirtschaft ; Estimation: General ; Single Equation Models; Single Variables: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes ; Model Evaluation, Validation, and Selection ; Financial Econometrics
• Subject: All share index ; Markov process ; regime switching ; stock market ; volatility

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Adejumo, Oluwasegun A. ; Albert, Seno ; Asemota, Omorogbe J.
• Event: Veröffentlichung
• (who): The Central Bank of Nigeria
• (where): Abuja
• (when): 2020

Further information

• DOI: doi:10.33429/Cjas.11220.3/8
• Handle: http://hdl.handle.net/10419/237429
• Last update: 10.03.2025, 11:41 AM CET