Determinants of Stock Market Volatility in Africa

Abstract

The volatility of stock market dampens investors’ confidence because of the uncertain returns associated with it, and the effect this may have on trading activities and investment worries policymakers as it may spillover to the general economy. The aim of this study is to examine the volatility of African Stock Markets and the factors influencing it in Africa. The Generalised Autoregressive Conditional Heteroscedasticity (GARCH) was used to generate the volatility, and the Generalised Method of Moments was applied on dynamic panel model to examine the factors that account for volatility in Africa. Sixteen (16) African Stock Markets were covered for the period 2013 to 2019. Data was sourced from African Securities Exchanges Association, Bank for International Settlements and World bank development Indicators databases. The study found that macroeconomic instability and financial liquidity variables determine stock market volatility in Africa. Specifically, macroeconomic instability has positive and significant effect on volatility, while stock market liquidity, diaspora remittances, growth in money supply negatively influence stock market volatility. This study recommends that the monetary authorities, particularly Central Banks should inculcate stock market volatility as part of its financial stability goal and apply financial liquidity tools like diaspora remittances, money supply, and stock market liquidity to mitigate it, while ensuring stability in the macro-economy.