CBN Journal of Applied Statistics (JAS)
Keywords
All share index, Markov process, regime switching, stock market, volatility
Abstract
This study is designed to model and forecast Nigeria’s stock market using the All Share Index (ASI) as a proxy. By employing the Markov regime-switching autoregressive (MS-AR) model with data from April 2005 to September 2019, the study analyzes the stock market volatility in three distinct regimes (accumulation or distribution – regime 1; big-move – regime 2; and excess or panic phases – regime 3) of the bull and bear periods. Six MS-AR candidate models are estimated and based on the minimum AIC value, MS(3)-AR(2) is returned as the optimal model among the six candidate models. The MS(3)-AR(2) analysis provides evidence of regime-switching behaviour in the stock market. The study also shows that only extreme events can switch the ASI returns from regime 1 to regime 2 and to regime 3, or vice versa. It further specifies an average duration period of 9, 3 and 4 weeks for the accumulation/distribution, big-move and excess/panic regimes respectively which is evidence of favorable market for investors to trade. Based on Root Mean Square Error and Mean Absolute Error, the fitted MS-AR model is adjudged the most appropriate ASI returns forecasting model. The study recommends investments in stock across the regimes that are switching between accumulation/distribution and big-move phases for promising returns.
Publication Title
CBN Journal of Applied Statistics
Issue
2
Volume
11
First Page
65
Last Page
83
Recommended Citation
Adejumo, Oluwasegun A.; Albert, Seno; and Asemota, Omorogbe J.
(2020)
"Markov Regime-Switching Autoregressive Model of Stock Market Returns in Nigeria,"
CBN Journal of Applied Statistics (JAS): Vol. 12:
No.
1, Article 6.
Available at:
https://dc.cbn.gov.ng/jas/vol12/iss1/6