A Comparative Analysis of Stock Return Behavior Using a Markov Switching Model (Case Study: Zimbabwe Stock Exchange)

Abstract

This research involved developing an optimal stock investment decision strategy which offers minimum risk to the potential investor for counters listed on the Zimbabwe Stock Exchange. Three counters were compared namely Econet Wireless, Delta and Old Mutual. The first phase of the project involved understanding how stock returns behaved by examining the transition matrices of the counters. The second phase of the project involved determining how much time it took for a counter to be in a positive return state. The final phase involved determining the long run probability of an investor being able to get any positive returns from a specific counter. From the three counters, Old Mutual had the highest long run probability 96.1% of being in the bull market, followed by Delta which had a 49.6% chance and lastly Econet which had a 47.1% probability of being in the bull market in the long run. Hence, Old Mutual was found to be the most preferred counter since it had a greater chance of providing the potential investor with positive returns in the future.