African equity markets integration: a case study of COMESA
Date
2017
Authors
Mundonde, Justice
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Abstract
The vicious quest for higher risk-adjusted returns through diversification of portfolios has seen an enormous amount of foreign capital flows into new emerging markets. However, the success of any strategy profoundly depends on the degrees of comovements among markets - higher comovements limit the possible gains from diversification. It has been argued that the very act of chasing after these diversification benefits, which mainly includes financial globalisation, has actually resulted in the erosion of the benefits themselves. In addition, aspects such as international trade, the establishment of trade blocs and liberalisation of market controls has further reduced these diversification benefits. In this study, the long-run cointegration, short-run causality and volatility linkages were examined using six COMESA markets indices. The goal of the study was to ascertain whether the establishment of this bloc has resulted in increased association among the member markets.
The astonishing rate at which globalisation has been growing at has drawn with it both opportunities and risks for investors. The Engle-Granger, the Johansen cointegration technique and the ARDL test methods revealed that the markets integrated in the long run, a result indicative of low diversification benefits across COMESA markets. However, the weak short-run causality from the causality tests revealed that despite the strong long-run relationship, an active investment strategy that seeks to diversify portfolios in the short-run could still yield enormous diversification benefits. A subsequent examination of the volatility linkages using generalised autoregressive conditional heteroscedasticity models revealed that uniformity of volatility structures in terms volatility persistence, leverage effects and risk premium across the markets, indicative of the high likelihood of volatility spill-overs across the markets. This implies that, despite the weak short-run causality, the benefits from short-run diversification can still be quite low due to the high likelihood of volatility spillovers across these markets. In light of these results, investors within the COMESA markets should rather focus on other markets outside the COMESA as diversification destinations.
Description
This thesis is submitted in fulfilment of the requirements for the degree of Master of Management in Finance and Investment.
Faculty of Commerce, Law and Management
2017
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Citation
Mundonde, Justice (2017) African equity markets integration: a case study of COMESA, University of the Witwatersrand, Johannesburg, <http://hdl.handle.net/10539/23381>