Risk transmission of stock market movements: evidence from the us and selected African countries
Chatukuta, Trevor Tatenda
Risk spillover and contagion studies have recently gathered momentum especially with the continuous recurrence of financial and economic crisis globally. Nonetheless, the financial world tends to lack unanimous view on how to properly define contagion. Many studies on risk transmission, spillover and contagion focused mainly on first and second order moments which does not fully consider market traits such as asymmetry. Moreover, the literature on spillover and contagion in Africa is relatively scanty despite the continent being home to only emerging market economies. This study sought to examine the sources and mechanisms of connectedness and risk propagation by applying a technique proposed by Baruník and Krehlík (2018) which advocates for the study of pairwise and inter-national higher order moments. In addition, the technique is based on the premise that innovations or shocks to a market impact variable at numerous frequencies with varying strengths and therefore short-, medium-, and long-term frequencies are used. An inherent merit of using frequencies is that they work on the premise that economic players operate using varying investment horizons which is captured by time-varying frequencies. By studying risk transmission between the United States of America (the US) and selected African markets (Egypt, Nigeria, Kenya and South Africa), this study observed that, except South Africa, these elected African markets were less impacted by the shocks that originated in the US. This was observed from the higher moment skewness based on the weekly data between 25 November 2001 and 30 December 2018. The conclusion is that stronger spillover of shocks is evident among these selected markets (pairwise spillover). Also, by examining the higher moment measures on absolute, net spillover and the within spillover transmission, this study contributed to the literature by concluding that most of the selected African markets recorded strong net risk recipients and net risk transmission at times adrift from the common global crisis periods such as the 2007 to 2009 crisis. This partially concurs to the recent notion of post-crisis contagion.
A research submitted in fulfilment of the requirements for the degree of Masters of Management in Finance and Investment (MMFI) to the Faculty of Commerce, Law and Management, Wits Business School, University of the Witwatersrand, Johannesburg, 2020