Risk spillovers and portfolio management between developed and African capital markets

Abstract

This paper investigates spillover effects and portfolio diversification between two major developed stock markets (UK, US) and four emerging stock markets in Africa (South Africa, Nigeria, Egypt and Kenya). To this end, we apply the BK-spillover index model to daily spot indices during the period 2000–2021. The findings show that both the developed and the African markets have a sizeable and asymmetric long memory process. Based on the model's estimates, we also examine the hedging efficiency. The findings highlight the significance of overweighting developed country companies in ideal portfolios relative to stocks from African markets. Finally, we assess the practical implications for mixed developed-African stock portfolios, based on finding strong evidence of diversification benefits and downside risk reductions that confirm the usefulness of using developed market stocks in the African stock portfolio risk management