A study measuring the connectedness of African and advanced financial markets using spillover indices

Abstract

Investors are always searching to diversify their portfolios and manage risks. South Africa, Kenya, Egypt and Nigeria are African frontier and emerging market economies that are potentially attractive to such investors. This study examines whether African equity markets are suitable for investment diversification amongst themselves and advanced market investors from countries such as the United States and the United Kingdom. The paper uses Diebold and Yilmaz (2012) spillover indices to make this determination, by measuring the connectedness of the returns and volatilities, for the period 2008 to 2022 using both weekly and daily data. The daily and weekly results show that advanced and African markets have low interdependence, except for South Africa, that shows stronger connectedness with advanced markets. South African policymakers can consider developing policies that are responsive to advanced market shocks. Additionally, African policymakers can consider developing policies that promote a Pan-African market that has consistent regulatory, listing and trading requirements to promote African economic growth. The diversification opportunities that are present may have limited efficacy due to the composition of African stock markets. The volatility spillover plots display more sensitivity to market dynamics than the returns, as significant cycles and bursts are identifiable.