Correlation of stock market returns in the West African region from 2008 to 2016

Eseosa Obadiaru,Henry Inegbedion,Barnabas Obasaju,Alex Omankhanlen

doi:10.21511/imfi.16(3).2019.12

Eseosa Obadiaru, Henry Inegbedion + Show 2 more

Open Access

https://doi.org/10.21511/imfi.16(3).2019.12

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Abstract

Stock markets over the world have become more interconnected due to activities of foreign investors in search for alternative financial assets and markets to invest in order to diversify their portfolio. Stock market indices and index returns have been known to reflect linkages between different markets. This study assesses the extent of correlation of stock market index returns in West Africa and those of the United States of America (US) and United Kingdom (UK) from 2008 to 2016. The correlation between the index returns for the entire sample period and yearly samples were considered for Nigeria, Ghana, the BRVM, the USA and the UK. The indices selected for the five countries considered are the Nigerian All-Share Index, Ghanaian Composite Index, the BRVM Composite Index, the Financial Times 100 Index and the Standards and Poor’s 500 Index. Daily index returns data were used for the study and analyzed using correlation and multiple regression analysis. Findings revealed that the returns of the pairs of the United States of America (US) and the United Kingdom (UK) exhibited stronger positive correlation with each other than the other market pairs in the study both in the entire sample period and the yearly sub-period analysis. The correlations between the other market pairs were either positively or negatively weak or very weak indicating more diversification opportunities.

Highlights

Stock markets are known as engines of economic growth across the world (Osaze, 2007; Aregbeshola, 2016)
Value is between the United States of America (US) and United Kingdom (UK) markets returns, indicating a strong relationship, followed The implication of the regression result is generby the Nigerian and UK returns and the other ally in line with those of the correlation analysis, market pairs, which are all very weak
Obadiaru as it reveals that the US and UK stock markets et al (2018) though found significant mean and are strongly connected, but showed a weak relavolatility spillover amongst the stock markets in tionship between the Nigerian and UK market, the West Africa region, the difference in find- as well as between the West African Economic and Monetary Union (WAEMU) and Ghanaian ings could be attributed to the difference in the stock markets

Summary

Introduction

Stock markets are known as engines of economic growth across the world (Osaze, 2007; Aregbeshola, 2016). Stock market indices could be used to assess the performance of stock markets, as they can depict if a particular market is experiencing an upward (bull) trend, which indicates a general increase in the value of shares or a downward (bear) trend, indicating a general decrease in the value of shares. While the index returns are relevant in assessing overall returns in a market or market segment, index funds are usually tied to particular market indices, thereby making the performance of the fund to be basically determined by the performance of the index. Stock markets across the world have become more interdependent than isolated due to increasing levels of financial globalization and liberalization, internationalization and integration.

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