The JSE size-based indices and country risk components under bullish and bearish market conditions
by Paul-Francois Muzindutsi; Sandisiwe Mbili; Nkosinathi Molefe; Halala Ngcobo; Fikile Dube
International Journal of Economic Policy in Emerging Economies (IJEPEE), Vol. 18, No. 3/4, 2023

Abstract: Studies linking stock market indices to country risk ratings have mostly focused on the overall country risk rating, with limited attention to the disaggregated components of country risk rating. This study examined the response of different JSE size-based indices to the changes in economic, financial, and political components of country risk rating under different market conditions. The Markov switching model (MSM) model was utilised to analyse monthly stock returns of four size-based indices from July 2002 to December 2018. The findings revealed that the small and medium size indices react heavily on political and economic risks with economic risk showing weak effect on stock returns. We further established that the risk factors are most prominent in the bull regime than in the bear regime, indicating the adaptive behaviours towards country risk shocks. Therefore, the management of a stable political environment is crucial for the stability of stock markets in developing countries. These findings extend to the current understanding of emerging financial markets and provide capital market participants with valuable insight into their investment strategies.

Online publication date: Tue, 30-Jan-2024

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