Volatility Tests of Stock Returns of an Emerging Market: Evidence from Botswana Stock Exchange

Abstract

Abstract: This paper attempts to examine the time-series behavior of stock return in an emerging market. The study employs the dynamic time series analytical tools using daily Index return and individual companies daily return listed on the Botswana Stock Exchange (BSE) during 2000 to 2007 sample period. The findings from nonlinear model GARCH (constant volatility) and Component GARCH (time varying volatility) reveals a significant volatility and indicates persistence of both the permanent and transitory component of volatility. The significant transitory component shocks indicates mean reversion tendency of the price series. However, the behavior of the return series can be explained in different ways such as: market imperfections, noise trading, some features of market microstructure may lead to delays of response to new information; transaction cost may make investors reluctant to respond rapidly to the arrival of new information. The implication of the study is that it provides an important input for portfolio management, security valuation, risk management, option pricing, market regulation and monetary policy making. Finally, the study reflects the properties of time series returns in Botswana emerging market not included before contribute to the existing literature.