Integration of African Stock Markets with the Developed Stock Markets: An Analysis of Co-Movements, Volatility and Contagion

This paper investigates evidence of integration and contagion between major African stock markets (ASMs) and developed stock markets during the periods of global financial crisis (GFC) and Eurozone sovereign debt crisis (ESDC). Specifically, it examined whether the co-movement between ASMs and developed stock markets during the two crisis periods is related to their level of financial integration or due to contagion. The study finds limited evidence of integration between ASMs and developed markets. However, the analysis of dynamic correlations shows that the conditional correlations are typically positive and higher during the periods of crisis, indicating substantial evidence of contagion. These findings suggest that the observed co-movements between stock markets during the crises were mainly due to contagion. The findings of this paper have several implications with respect to financial market stability, portfolio diversification and policy interventions.