Effects of diamond price volatility on stock returns: Evidence from a developing economy

Abstract

High diamond price volatility can have significant impact on Botswana's diamond-driven economy. The global economic crisis of 2008-2009 saw the local economy characterised by heightened commodity price uncertainty, falling stock prices and dwindling international demand for diamonds. In this paper we employ a number of techniques to analyse and assess the effect of diamond price volatility on stock returns in Botswana. Firstly, estimation of a Markov Switching model reveals that high volatility regimes in diamond prices have become more frequent and persistent since the recession. Secondly, a bivariate GARCH-in-Mean VAR model is estimated and the results recognize that diamond price volatility has a positive and significant influence on stock returns in Botswana.