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Financial fluctuations in the Tunisian repressed market context: a Markov-switching-GARCH approach

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  • Ali Chebbi
  • Raoudha Louafi
  • Amel Hedhli

Abstract

Small open economies are not immune to financial shocks. Fluctuations arising there interest more and more decision makers as they influence their policies' effectiveness. A common belief is that opening the capital account is the primary source of financial instability. In this article we show that even if a capital account is not previously opened in Tunisia, the investor sentiment plays the role of the transmission channel of financial fluctuations. On monthly data (2000:01-2010:03) we filter financial business cycles via the Hodrick-Prescott procedure. Also we establish their turning points in Tunisian, Moroccan and French markets using the Bry-Boschan algorithm. Thus we build the investor sentiment index in Tunisia. Then we use it for the estimation of the financial volatility through a Markov switching-GARCH model. We show that business financial cycles in Tunisia are partially synchronized with those in France and the Tunisian investor's sentiment is a significant explicative variable of the financial volatility. Therefore, we recommend a financial stabilization policy based on agent's expectations for better macroeconomic effectiveness policies.

Suggested Citation

  • Ali Chebbi & Raoudha Louafi & Amel Hedhli, 2014. "Financial fluctuations in the Tunisian repressed market context: a Markov-switching-GARCH approach," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 7(2), pages 284-302, September.
    • Handle: RePEc:taf:macfem:v:7:y:2014:i:2:p:284-302
    DOI: 10.1080/17520843.2013.781048
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    1. Gerhard Bry & Charlotte Boschan, 1971. "Foreword to "Cyclical Analysis of Time Series: Selected Procedures and Computer Programs"," NBER Chapters, in: Cyclical Analysis of Time Series: Selected Procedures and Computer Programs, pages -1, National Bureau of Economic Research, Inc.
    2. Gerhard Bry & Charlotte Boschan, 1971. "Cyclical Analysis of Time Series: Selected Procedures and Computer Programs," NBER Books, National Bureau of Economic Research, Inc, number bry_71-1, March.
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    1. Chebbi, Ali & Hedhli, Amel, 2022. "Revisiting the accuracy of standard VaR methods for risk assessment: Using the Copula–EVT multidimensional approach for stock markets in the MENA region," The Quarterly Review of Economics and Finance, Elsevier, vol. 84(C), pages 430-445.

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