African Financial Markets: A Spillover Analysis of Shocks

Two new facts related to emerging African fi nancial markets have recently attracted attention: African fi nancial markets are becoming an interesting and profi table alternative to diversify investment risk; and China, the UK and the US are increasingly infl uential in Africa. Focusing on the volatility of fi nancial markets, this paper analyses the relationships between developed markets (US, UK and China) and some SSA emerging markets (Kenya, Nigeria and South Africa) in the period 2004-2009 using a Multiplicative Error model. We model the dynamics of the volatility in one market including inter-actions from other markets, and we build a fully inter-dependent model. Results show that South Africa and China have a key role in all African markets, while the infl uence of the UK and the US is weaker. Developments in China turn out to be (fairly) independent of both UK and US events. We also derive impulse response functions with a time dependent profi le to describe how a volatility shock from one market may propagate to other markets. With the help of graphical presentation, we show how recent turmoil hit African countries, increasing the fragility of their infant fi nancial markets.