Abstract
There is a large body of research that proves the co-movement of international stock markets over time. This co-movement manifests through various instruments ranging from stocks and bonds, to soft commodities and can be visualised as returns and volatility spill-over effects. During the most recent financial crisis, it was once again highlighted that no market is immune to spill-over effects from other international markets. By employing an aggregate-shock (AS) model, returns and volatility spill-over effects of the Hang Seng, London, Paris, Frankfurt and New York stock markets to the JSE are confirmed. The findings also confirm the JSE All share index is directly affected through contagion by the returns of the economic area where the crisis originates. However, the results further confirm that South Africa has progressed in shielding its stock market against financial crises in recent times. These findings hold important implications for stock portfolio managers in South Africa.
Highlights
Over the past three decades financial markets around the world have become increasingly interconnected (Baele & Inghelbrecht, 2010)
Given the main findings from studying the price and volatility transmission during four international financial crises, it is possible to conclude that during the manifestation of an international financial crisis, the Johannesburg Securities Exchange (JSE) All share index mostly seems to be affected through contagion by the returns of the originating crisis country
It stands to reason that strong trade and financial linkages between South Africa and the other markets under observation, may explain investor behaviour that drives the transmission of contagion effects during a financial crisis
Summary
Over the past three decades financial markets around the world have become increasingly interconnected (Baele & Inghelbrecht, 2010). Emerging economies too have benefitted from global financial integration, they have succumbed to increased financial turbulence in the form of heightened asset price volatility. Investors in countries affected by these crises may lose confidence in capital markets when sharp asset price fluctuations cannot be explained by fundamental economic factors, leading to a reduction in capital flows towards equity markets (Daly, 2008:2378). It is important to measure volatility in an attempt to better understand the fundamental economic factors that drive the world economy. In order to fully understand the dynamics of an equity market, it is necessary to be informed where this volatility originates. After acquiring this knowledge, can market participants hedge their positions
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