Seasonality Effects, Stock Exchange and Foreign Exchange Markets: Comparative Analysis of Volatility Behavior During Covid-19

Abstract

This study investigated the effects of seasonality on stock exchange and foreign exchange markets of two WAMZ and two BRICS countries which include Nigeria, Ghana, and Brazil and China. The Auto Regressive Integrated Moving Average (ARIMA) regression approach and the Markov-regime switching methodologies were executed. The parsimonious ARIMA estimates reported Nigeria’s stock returns demonstrated lower volatility (SIGMASQ = 0.000141) than Ghana’s stock returns (SIGMASQ = 0.004003). Similarly, Nigeria had a lower returns volatility than Ghana (SIGMASQ = 0.001829 < 0.07727) in the foreign exchange market of their respective local currencies in relation to the US dollar during the covid-19 era. Comparatively, Nigeria’s stock and foreign exchange market performance showed lower returns volatility behaviour than Ghana’s markets during the covid-19 period. Brazil’s stock returns and the foreign exchange market return on the Brazilian Real had higher volatility compared to the Chinese stock market returns and the return on the Chinese Yuan exchange rate vis-à-vis the US dollar during the covid-19 era. Comparatively, Brazil’s stock and foreign exchange performance showed higher returns volatility behaviour than China during the covid-19 period. The ARIMA estimates were upheld by the Markov-switching regression results which reveal highest volatility effect of the foreign exchange market in Ghana and Brazil. Ghana's stock market volatility reverted more quickly than that of Nigeria, while in the second and third regimes, volatility of the Nigeria's stock exchange reverted more speedily than that of Ghana. The Markov estimates also reveals that China had more time than Brazil for stock market volatility to be repaired in the first regime, 40.43 months as against 36.77 months but a much lower time for China’s stock volatility to be restored in the second and third regimes, during and after the covid-19 pandemic. The expected durations in the regimes for the Brazilian forex market are 40.96, 47.98, and 33.99 months compared to 29.78, 27.55, and 21.65 months in the first, second, and third regimes. The study thus established that volatility on the returns of the Brazilian foreign exchange market before, during, and after the covid-19 pandemic takes longer time to die off unlike in the case of China’s forex market. The empirical findings validate the significance of the business cycle theory in these markets. Accordingly, our findings explicate the presence of sizable effects of cyclical swings on the stock and foreign exchange markets of Ghana, and Brazil compared to that of Nigeria and China respectively.