Abstract:
In this paper, we apply Markov chain techniques to select the best financial stocks listed on the Ghana Stock Exchange based on
the mean recurrent times and steady-state distribution for investment and portfolio construction. Weekly stock prices from
Ghana Stock Exchange spanning January 2017 to December 2020 was used for the study. A three-state Markov chain was used
to estimate the transition matrix, long-run probabilities, and mean recurrent times for stock price movements from one state
to another. Generally, the results revealed that the long-run distribution of the stock prices showed that the constant state
recorded the highest probabilities as compared to the point loss and point gain states. However, the results showed that the
mean recurrent time to the point gain state ranges from three weeks to thirty-five weeks approximately. Finally, Standard
Chartered Bank, GCB, Ecobank, and Cal Bank emerged as the top best performing stocks with respect to the mean recurrent
times and steady-state distribution, and therefore, these equities should be considered when constructing asset portfolios for
higher returns.
