Co-Movements between Developed Stock Markets and the Frontier Stock Markets of Africa
39 Pages Posted: 19 Jul 2012
Date Written: March 1, 2011
Abstract
It has been widely noted that as the world becomes more connected the movements of the Developed and the main Emerging Stock Markets of the world are getting correlated over time. This co-movement of the world’s Developed and Emerging markets reduces the benefit that could be obtained from diversification across more than one national market. The key question for international investors who are seeking higher returns and less volatility in their portfolio is whether diversifying into the smaller, less liquid Frontier Emerging Markets, simply known as Frontier Markets, would provide the needed variation in equity price movements.
This dissertation seeks to answer this question by investigating the degree of correlation in the movements of the equity prices of Frontier African Stock Markets with those of the Developed Stock Markets of the world. African markets rather than other Frontier markets were chosen for this study because the region as a whole is largely a 'Frontier' Market. Asia and Latin America are dominated by huge Emerging Market economies, North America and Europe and by and large Developed Markets.
The investigation commences with a detailed discussion of relevant existing literature. None of the journal articles published to date seem to specifically address the co-movement between African and Developed stock markets. Also coverage of African Markets seems to be generalized, covering the continent as a whole; this study focused on the relatively liquid and better developed Frontier African stock markets of Tunisia, Kenya and Nigeria.
Mathematical models are used to compute the degree of correlation of the sample of three markets from each of the Developed, Emerging and Frontier Africa Stock Market segments. Other relevant figures such as variability of returns and the total returns are also computed from the sample indexes.
In conclusion, the study establishes that Frontier African markets have a lower degree of correlation with Developed Markets as compared to Emerging Markets. The risk of investing in these markets in terms of variability of returns is found to be less than that for Emerging Markets. Finally, the degree of correlation in the stock movements between the individual African Markets is found to be low.
Keywords: African stock markets, correlation of movements between markets
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