The Devil is in the Tails - Modeling the Fat-Tails in Sub-Saharan Africa Equity Markets Using Extreme Value Theorem
DOI:
https://doi.org/10.47963/jobed.v13i.1785Keywords:
extreme outcomes, tail risks, frontier markets, expected shortfall, Sub-saharan AfricaAbstract
This paper investigates the presence and implications of fat-tailed return distributions in Sub-Saharan African equity markets using Extreme Value Theory (EVT). While traditional asset pricing models often assume normality, frontier markets, characterised by low liquidity, regulatory asymmetries, and episodic volatility in returns, frequently exhibit return dynamics that deviate from Gaussian assumptions. We apply both block maxima and peaks-over-threshold approaches to daily equity index returns from selected Sub-Saharan exchanges, including Ghana, Nigeria, Kenya, and Botswana, over a 6-year period. Our findings reveal statistically significant tail heaviness and asymmetric risk exposures across markets, with implications for Value-at-Risk (VaR) estimation, portfolio optimisation, and systemic risk monitoring. The EVT-based models consistently outperform conventional parametric alternatives in capturing extreme downside risk. These results drive home the importance of tail-sensitive risk management frameworks in sub-Saharan stock markets and offer new insights into the structural fragility and resilience of frontier financial systems. The paper contributes to the literature by extending EVT applications to under-represented markets and by providing a robust empirical foundation for regulatory stress testing and financial innovation in the region.
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