Effects of Investor Sentiment and Geopolitical Risk on Stock Return Volatility in East African Frontier Markets: Evidence from a GARCH-X Framework
Effects of Investor Sentiment and Geopolitical Risk on Stock Return Volatility in East African Frontier Markets: Evidence from a GARCH-X Framework

Summary/Abstract: Purpose: In an environment of rising global uncertainty and increasing sensitivity to behavioural and geopolitical shocks, this study examines the effects of investor sentiment and geopolitical risk on stock return volatility in East African frontier markets. Design/Methodology/Approach: Daily stock index returns data for Nairobi, Dar es Salaam, Uganda, and Rwanda from 2014 to 2025 are analysed using ARMA-GARCH and extended ARMA-GARCH-X models. Investor sentiment is constructed using principal component analysis (PCA) of market-based proxies of international indicators, and geopolitical risk is measured using the Caldara-Iacoviello index. Investor sentiment and geopolitical risk are incorporated into both the mean and variance equations within a GARCH-X framework to assess their effects on return dynamics and time-varying volatility. Findings: Volatility exhibits strong persistence, clustering, and heavy tails across East African frontier markets. Investor sentiment exerts a consistent influence on volatility, while geopolitical risk plays a weaker and more episodic role. Asymmetric volatility responses are evident in most markets, and the limited predictability of returns in the mean equation remains broadly consistent with weak-form efficiency, although the overall results better support an adaptive market interpretation. Practical implications: The sensitivity of volatility to sentiment and geopolitical risk highlights the importance of incorporating behavioural and external risk indicators into risk management and portfolio allocation decisions in frontier markets. Originality/Value: This study contributes to the limited literature on East African frontier markets by providing direct evidence on the role of investor sentiment and geopolitical risk in explaining volatility, extending beyond traditional volatility modelling frameworks to offer novel perspectives. Paper Type: Research Paper

• Details
• Contents