Geopolitical Risk and Its Management in Cameroon's Capital Market (2015–2023)

Abstract

Abstract Geopolitical risks play a crucial role in shaping financial markets, particularly in emerging economies where political instability and external shocks impact investor confidence and economic stability. Cameroon, a central player in the economic landscape of Central Africa, has experienced significant geopolitical challenges between 2015 and 2023, affecting the volatility of its capital market. Socio-political unrest, regional security threats, and fluctuations in global commodity prices have led to market uncertainty and influenced financial performance. This paper examines these risks, their effects on the Douala Stock Exchange (DSX), and strategies to manage them effectively. Cameroon’s geopolitical risks stem from prolonged political instability, cross-border security threats, and global economic fluctuations. The Anglophone crisis, regional conflicts, and oil price volatility have triggered capital flight and reduced investor participation. Using empirical data, this study applies the Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model to assess stock price fluctuations and determine the extent of market instability. The findings indicate that local and external events significantly influence DSX market performance, with commodity price fluctuations playing a major role in shaping investor sentiment. Graphical analyses of stock index performance, volatility trends, and their correlation with major geopolitical events highlight key patterns in market instability. The paper further explores essential risk management strategies aimed at stabilizing the financial sector and enhancing investor confidence. One major approach is market diversification, reducing overreliance on commodities to create a more balanced economic environment. Strengthening regulatory frameworks is also recommended to improve market transparency and attract both local and international investors. Regional economic cooperation within the Economic and Monetary Community of Central Africa (CEMAC) is highlighted as a crucial measure to mitigate cross-border risks. Enhanced trade, security collaboration, and financial integration can foster stability and encourage foreign direct investment (FDI). Additionally, leveraging advanced risk assessment tools, such as geopolitical risk indicators and predictive analytics, can help market participants anticipate potential disruptions and implement proactive mitigation strategies. This paper underscores the significant influence of geopolitical risks on Cameroon’s capital market and offers practical solutions to reduce market volatility. By adopting comprehensive risk management strategies which include diversification, regulatory improvements, regional partnerships, and data-driven forecasting Cameroon can foster a more resilient financial sector. The study contributes to broader discussions on financial stability in emerging economies, emphasizing the interconnections between political dynamics and market performance in an evolving global economy. Keywords: Geopolitical risk, capital market, Cameroon, stock volatility, investor confidence, financial stability.