Abstract
Understanding the volatility behaviour of specific sectors of the economy enables investors to formulate workable investment strategies, and policy-makers to formulate policies that dampen excess volatility. This study examined the volatility features of the infrastructure sector in emerging markets. The features assessed were the GARCH effects, volatility persistence, and leverage effects. EGARCH and GJRGARCH models of order one under normal and non-normal error distributions were employed to unpack the volatility behaviour of infrastructure returns in emerging markets. The results from both models under all distributions indicated the existence of GARCH effects, volatility clustering, volatility persistence, and leverage effects in the infrastructure sector in emerging nations. This implies that past conditional variance is significant in determining current conditional variance, thereby rendering forecasting a worthwhile task. The findings also suggest that investors interested in the infrastructure sector in emerging markets should incorporate leverage effects in their estimation of value-at-risk. Furthermore, they should focus on factors other than mean-variance portfolio optimization and consider leverage effects, excess kurtosis, and skewness when making investment decisions. Finally, investors in the infrastructure sector in emerging markets are encouraged to formulate hedging strategies as they are exposed to significant risk and uncertainty.
Highlights
The volatility of financial markets is becoming increasingly important to investors and policy-makers, especially after the global financial crises of 2007/8
Exponential Generalized Autoregressive Conditional Heteroscedasticity (EGARCH) and GJRGARCH models of order one under normal and non-normal error distributions were employed to unpack the volatility behaviour of infrastructure returns in emerging markets. The results from both models under all distributions indicated the existence of GARCH effects, volatility clustering, volatility persistence, and leverage effects in the infrastructure sector in emerging nations
The findings suggest that investors interested in the infrastructure sector in emerging markets should incorporate leverage effects in their estimation of value-at-risk
Summary
The volatility of financial markets is becoming increasingly important to investors and policy-makers, especially after the global financial crises of 2007/8. Biases (such as overconfidence and over-reaction to negative news) among investors and fund managers (Takemura et al, 2018) This could result in the infrastructure sector exhibiting similar risk-return features to those in other sectors. Wurstbauer and Schafers (2015) and Finkenzeller (2012) noted that few academic studies had been conducted on the infrastructure sector in general, and on volatility features in emerging markets. Publications by investment professionals and companies have employed basic statistical approaches (like standard deviation and mean return) to analyze the volatility profile of this sector Most of these studies (biased towards industrial bulletins) have been confined to developed nations. Leverage effects imply an asymmetric response of conditional variance (volatility) to changes or shocks by the variable under study. Section four presents and discusses the findings, and section five provides an overall conclusion and recommendations to investors and policy-makers
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