On the dynamic effects of global commodities on stock market blocks in Africa

ABSTRACT

This article explores the commodity–equity links in the Africa markets by distinguishing between short- to long-run co-movements driven by market shocks. Using the value-weighted average method, available Africa’s stock markets are aggregated into four market blocks. Global oil and gold returns are used as proxies for commodities. Coherency between pairs of markets is examined with the use of continuous Morlet wavelet transform. Results reveal abstemiously high degree of co-movements between the commodity–equity markets in the short- to medium-term frequencies with nonhomogenous lead–lag nexuses, signifying greater benefits of diversification in the long-term. These findings provide investors with relevant strategies for hedging.

KEYWORDS:

• Global commodity
• wavelet analysis
• coherence
• stock market blocks

JEL CLASSIFICATION:

• C40
• F36
• G11
• G15

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ We obtain the market blocks using the value-weighted average price method, computed as: where, represent the chosen markets in a geographical region; denotes weight of each based on market capitalization expressed to be the total market capitalization of markets in region ; represents monthly price index of market in region across time ; is the total number of markets in region .

² See Grinsted, Moore, and Jevrejeva (2004) for details on wavelet.

³ A Phase angle or difference defines the differences in degrees or radians between two series which possess identical frequency and referenced to the same point in time.

⁴ Monthly data poses fewer problems pertaining to nonsynchronous trading times among markets; and is less characterized by high noise-to-signal ratio, as witnessed in higher-frequency data.

⁵ Arrows to the right and left indicate pair of series is in-phase and out-of-phase, respectively; right and up signify the first series is lagging; right and down suggest the first is leading; the first series leads if arrows turn left and up; the first series lags if it turns left and down. Arrows pointing down means the first series is leading; up means the second series is leading.