A Regime Switching Skew-Normal Model of Contagion in Major African Stock Markets

Abstract

This study was carried out to examine the contagion and structural break for some selected African stock markets namely: Nigeria, Ghana, South Africa (SA), Tunisia, and the US stock market. To achieve this, two periods were considered, that is the crisis period, 31st December, 2013 to 31st December, 2017 and the non-crisis period, 1st January, 2018 to 31st December, 2019. The choice of these periods was to reflect the structural break caused by economic recession in Nigeria during the crisis period. The expectation is that there is capital flight from Nigerian equities to safety in the selected emerging economies in Africa and in the US economy. Following the work of Chan et al (2018), the study used Regime Switching Skew-Normal (RSSN, henceforth) model which is capable of measuring contagion and structural breaks between markets and across crisis and non-crisis periods. The RSSN model was estimated using Bayesian method. The study finds the existence of moderate contagion between Nigeria and SA and the absence of contagion with the rest of the economies, suggesting there is capital flight from equities in Nigeria to SA for safety during the 2016 economic recession. Also, the study confirms the presence of structural break between crisis and non-crisis periods as the probability of average return declines during crisis period. The absence of contagion among African stock markets suggests there is no significant economic cooperation and cross-border portfolio investment flow among the countries. This development further underpins the imperative of the full implementation of African Continental Free Trade Area (AfCFTA), which is to encourage economic activities and investment flow on the continent.