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

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. [ABSTRACT FROM AUTHOR]