Time-Varying Conditional Co-movement between Inter-Sector Stock Returns: Evidence from Ghana Stock Market

Abstract

Investors generally exhibit home bias with regards to their investment destinations. To diversify their portfolio, such investors invest in different sectors within the domestic economy. However, such behaviour could be counter-productive in periods of increased co-movement of assets returns.  In this paper, we examine the inter-sector stock return co-movement among the major sectors of the Ghanaian economy with the view to shedding some light on the nature of assets return correlations and its implications for portfolio diversification.  A sample of 332 weekly observations of stock returns of five major sectors within the Ghanaian economy is used to undertake the analysis. Dynamic Conditional Correlation - Generalized Autoregressive Conditional Heteroscedasticity (DCC-GARCH) techniques are applied to the weekly stock return series from January 2010 to June 2017. The DCC-GARCH model was estimated with correlation targeting and asymmetric DCC. We find dynamic conditional correlation among stock returns of all the sectors, implying that the correlation between the sector returns is time-varying. This result challenges the assumption of constant correlation among stock returns of different sectors in the domestic markets. We also find that the conditional correlation between returns of the various sectors ranges from 0.234 to 0.998, which indicates medium to very high interdependence among the stock returns. Based on the result of this study, we propose that fund managers and investors should not limit their diversification strategies to inter-sector investments since in periods of uncertainty, the ability of the investor to enjoy diversification benefits is seriously undermined.