Analysing Rational Bubbles in African Stock Markets: Evidence from Econophysics Frequency Domain Estimates and DCC MGARCH Model

The stock market operates on informed decisions based on information gathered from heterogeneous sources, encompassing diverse beliefs, strategies, and knowledge. This study examines the validity of rational bubbles in stock market prices, focusing on eight African stock markets: South Africa, Niger...

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Bibliographic Details
Published in:Economies 2024-08, Vol.12 (8), p.217
Main Authors: Lawal, Adedoyin Isola, Oseni, Ezeikel, Ahmed, Adel, Riyadh, Hosam Alden, Tabash, Mosab I, Abaver, Dominic T
Format: Article
Language:English
Subjects:
Africa
Analysis
Autoregression (Statistics)
bubbles
Correlation (Statistics)
Economic growth
econophysics
Emerging markets
Heteroscedasticity
Hypotheses
Inflation rates
Interest rates
International finance
Liquidity
Monetary policy
Securities markets
Stock exchanges
stock market
Stock markets
Stock prices
Volatility
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Summary:The stock market operates on informed decisions based on information gathered from heterogeneous sources, encompassing diverse beliefs, strategies, and knowledge. This study examines the validity of rational bubbles in stock market prices, focusing on eight African stock markets: South Africa, Nigeria, Kenya, Egypt, Morocco, Mauritius, Ghana, and Botswana. Utilizing newly developed econophysics-based unit root tests and the Dynamic Conditional Correlation Multivariate Generalized Autoregressive Conditional Heteroskedasticity (DCC MGARCH) models, the authors analyzed daily data from 1996 to 2022. Our findings indicate that these markets experienced bubbles at various points, often followed by bursts. These bubbles coincided with significant economic changes, suggesting a strong link between stock market behavior and economic growth. For instance, financial crises, political instability, and global economic downturns significantly influenced bubble formation and bursts in these markets. The study reveals that market-specific events, such as regulatory changes and shifts in investor sentiment, also contributed to the occurrence of bubbles. Three key policy options are proposed to address bubbles in the studied markets including, enhancing regulatory frameworks to monitor and mitigate bubble formation, improving financial literacy among investors to promote informed decision-making, and strengthening economic policies to stabilize macroeconomic conditions and reduce vulnerability to external shocks. By implementing these measures, policymakers can enhance market stability and foster sustainable economic growth in African stock markets.
ISSN:2227-7099
2227-7099
DOI:10.3390/economies12080217