Financial market integration in sub-Saharan Africa: How important is contagion?1

Abstract

This paper investigates effects of contagion in sub-Saharan African stock markets by examining both crisis and non-crisis contingent theories. Specifically, the paper examines cross-market linkages through heteroskedasticity bias-adjusted correlation in asset returns and assesses the impact of regional macroeconomic fundamentals on stock market volatility using GARCH-MIDAS technique. The crisis contingent results reveal that there is no evidence of contagion in sub-Saharan African markets from crises in global developed markets (the UK and the US). However, there is evidence of contagion from emerging market crises (China, South Africa, and Kenya). The non-crisis contingent analysis underscores the significance of regional economic fundamentals, especially inflation and the GDP, on stock market volatility in South Africa, Nigeria, and Kenya.