Measuring volatility persistence and risk in Southern and East African stock markets

This paper investigates volatility persistence in Southern and East African stock markets taking into account the rate of volatility decay. Generalised autoregressive conditional heteroscedaticity (GARCH) and GARCH-in-mean (GARCH-M) models are used to estimate volatility persistence and risk premium for these markets. The results presented here suggest that there is volatility persistence in emerging Southern and East African stock markets. Further empirical estimates show that rate of volatility decay varies considerably among the markets, for example, volatility in Mauritius diminishes to half of its original size within seven hours, while it takes almost eight months for volatility in Zambia to taper off to half of its original size. The study concludes that volatility risk exists in emerging Southern and East African stock markets and investors would require compensation for bearing this type of risk. The results here have important implications for portfolio allocation, asset pricing and risk management.