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

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.