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

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  • Adedoyin Isola Lawal

    (Department of Economics, Bowen University, Iwo P.O. Box 284, Nigeria)

  • Ezeikel Oseni

    (Department of Finance, University of Lagos (UNILAG), Lagos P.O. Box 132, Nigeria)

  • Adel Ahmed

    (Amity Business School, Amity University Dubai, Dubai International Academic City, Dubai P.O. Box 345019, United Arab Emirates)

  • Hosam Alden Riyadh

    (Department of Accounting, School of Economics and Business, Telkom University, Bandung 40257, Indonesia)

  • Mosab I. Tabash

    (Department of Business Administration, College of Business, Al Ain University, Al Ain P.O. Box 64141, United Arab Emirates)

  • Dominic T. Abaver

    (Department of Laboratory Medicine and Pathology, School of Medicine, Faculty of Medicine and Health Sciences, Walter Sisulu University, Eastern Cape 5117, South Africa)

Abstract

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.

Suggested Citation

  • Adedoyin Isola Lawal & Ezeikel Oseni & Adel Ahmed & Hosam Alden Riyadh & Mosab I. Tabash & Dominic T. Abaver, 2024. "Analysing Rational Bubbles in African Stock Markets: Evidence from Econophysics Frequency Domain Estimates and DCC MGARCH Model," Economies, MDPI, vol. 12(8), pages 1-22, August.
    • Handle: RePEc:gam:jecomi:v:12:y:2024:i:8:p:217-:d:1461910
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    References listed on IDEAS

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    1. Engle, Robert F & Sheppard, Kevin K, 2001. "Theoretical and Empirical Properties of Dynamic Conditional Correlation Multivariate GARCH," University of California at San Diego, Economics Working Paper Series qt5s2218dp, Department of Economics, UC San Diego.
    2. Walter Enders & Junsoo Lee, 2012. "A Unit Root Test Using a Fourier Series to Approximate Smooth Breaks," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 74(4), pages 574-599, August.
    3. Gourène, Grakolet Arnold Z. & Mendy, Pierre & N'gbo Ake, Gilbert Marie, 2019. "Multiple time-scales analysis of global stock markets spillovers effects in African stock markets," International Economics, Elsevier, vol. 157(C), pages 82-98.
    4. Farjam, Mike & Kirchkamp, Oliver, 2018. "Bubbles in hybrid markets: How expectations about algorithmic trading affect human trading," Journal of Economic Behavior & Organization, Elsevier, vol. 146(C), pages 248-269.
    5. Zhang, Mu & Zheng, Jie, 2017. "A robust reference-dependent model for speculative bubbles," Journal of Economic Behavior & Organization, Elsevier, vol. 137(C), pages 232-258.
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