Commodity-driven integration of stock markets in Africa

ABSTRACT

This article examines stock market integration for commodity-dependent African countries. The analysis is carried out in two phases – first we adjust the respective national equity returns for changes in commodity prices and examine integration in the context of commodity-adjusted stock returns, and second we focus on integration associated with changes in commodity prices in a novel modelling framework. The results for this unexamined area of research are interesting: (a) African stock markets are not driven by more than one common component and (b) commodity-adjusted integration is significantly lower than nonadjusted integration. We discuss the implications of the results for index construction, modelling and diversification in the conclusions.

KEYWORDS:

• Commodities
• stock market integration
• Africa
• diversification

JEL CLASSIFICATION:

• G10
• G11
• G15

Acknowledgement

Paul Alagidede acknowledges financial support from the African Economic Research Consortium(AERC) in conducting this research.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ See, for example, http://www.bloomberg.com/news/articles/2016-04-12/emerging-market-stocks-advance-for-fourth-day-on-dollar-weakness; http://www.reuters.com/article/us-global-markets-idUSKCN0W501Q; http://www.bloomberg.com/news/articles/2016-03-03/emerging-stocks-extend-rally-as-currencies-advance-amid-inflows. All accessed on 5 May 2016.

² For example, Kilian and Park (2009) document that equity prices respond to oil price shocks and oil price changes.