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Journal of Economics and Finance

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10-11-2020

African equity markets’ exposure to oil and other commodities - implications for global portfolio diversification

Authors: Imhotep Paul Alagidede, Gideon Boako, Bo Sjo

Published in: Journal of Economics and Finance | Issue 2/2021

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Abstract

This paper examined the risk-return relationship and the correlation dynamics of African stocks relative to global factors. By applying both the static and augmented capital asset pricing model, as well as dynamic conditional correlation methodology to daily returns series from January 3, 2003 to December 29, 2014, we find evidence of conditional correlation between African stocks and global factors influenced by the global financial crisis. From the risk-return point of view, Egypt and South Africa, although dominant, show relatively weak risk mitigating opportunities. Their information ratios are highly anemic to internationally accepted thresholds. Despite this, international investors seeking to diversify via uncorrelated markets may consider Africa, albeit on account of volatility persistence, present and past market conditions, market stability, as well as size and liquidity considerations.

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Our definition of private capital flows includes foreign direct investments (FDIs), portfolio capital flows and debt flows.

The share of global portfolio flows to Africa in 2010 was just about 1%.

This may be depending on whether the firm produces or consumes oil. Park and Ratti (2008) contend that an increase in the price of oil is not always a bad news for the equity market. “Shocks emanating from oil prices may be bad news for the stock market only when high oil prices arise from oil market-specific demand shocks related to shifts in the precautionary demand for crude oil in response to concerns about shortfall in future production” (Xu 2015, pp. 2610)

Alternatively, we could have relied on futures prices. However, as indicated by Vivian and Wohar (2012), spot prices constitute the underlying securities upon which derivatives are based. Relying on spot prices is also noted to avoid issues related to rollover of futures contracts (Creti et al. 2013).

The index with a base value of 100 as of 31 December, 1990 and computed every 15 s is made up of 22 exchange-traded futures on physical commodities. The represented commodities are weighted to account for economic significance and market liquidity. Commodity weights are based on production and liquidity subject to weighting restrictions applied annually such that no related group of commodities constitute more than 33% of the index and no single commodity constitutes more than 15%.

Figures are gleaned from various statistical bulletins of the IMF and World Bank.

The choice of the sample period is influenced by data availability for all variables.

The 1-month Treasury bill rate is sourced from the website of the Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/categories/116

Returns are standardized to achieve normality (see also, Pesaran and Pesaran, 2009).

The widely accepted IRs for performance superiority within the investment profession are 0.2 and 0.3 (Kidd 2011). See also Grinold and Kahn (1995)

Moss and Thuotte (2013) observes increases in correlation and report that excluding South Africa and Mauritius, the correlation between Sub-Saharan African stocks and the S&P 500 were 0.343 in 2000–2007, 0.702 in 2007–2009, and 0.749 in 2009–2011.

Figures are gleaned from World Development Indicators Database (2015) - http://wdi.worldbank.org/table/5.4, and the website of African Securities Exchanges Association (ASEA, 2015) - http://www.african-exchanges.org/yearly_statistic/comparative/

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Title: African equity markets’ exposure to oil and other commodities - implications for global portfolio diversification
Authors: Imhotep Paul Alagidede
Gideon Boako
Bo Sjo
Publication date: 10-11-2020
Publisher: Springer US
Published in: Journal of Economics and Finance / Issue 2/2021
Print ISSN: 1055-0925
Electronic ISSN: 1938-9744
DOI: https://doi.org/10.1007/s12197-020-09527-3

ECB’s unconventional monetary policy and bank lending supply and performance in the euro area

Erratum to: The role of circuit breakers in the oil futures market

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African equity markets’ exposure to oil and other commodities - implications for global portfolio diversification

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