Susceptibility of Stock Market Returns to International Economic Policy: Evidence from Effective Transfer Entropy of Africa with the Implication for Open Innovation

Anokye M Adam

doi:10.3390/joitmc6030071

Abstract

This study contributes to the scant finance literature on information flow from international economic policy uncertainty to emerging stock markets in Africa, using daily US economic policy uncertainty as a proxy and the daily stock market index for Botswana, Egypt, Ghana, Kenya, Morocco, Nigeria, Namibia, South Africa, and Zambia from 31 December 2010 to 27 May 2020, using the Rényi effective transfer entropy. International economic policy uncertainty transmits significant information to Egypt, Ghana, Morocco, Namibia, and South Africa, and insignificant information to Botswana, Kenya, Nigeria, and Zambia. The asymmetry in the information transfer tends to make the African market an alternative for the diversification of international portfolios when the uncertainty of the global economic policy is on the rise. The findings also have implications for the adoption of open innovation in African stock markets.

Highlights

The response of financial markets to the global financial crisis of 2008/2009 (GFC) and the current coronavirus disease 2019 (COVID-19) pandemic echoed the impact of globalization on the financial market of developed and emerging markets
The data set for this analysis consists of the daily US economic policy uncertainty index (EPU)
The positive Rényi effective transfer entropy in all cases shows that the risk about the future returns of African stocks is reduced by the knowledge of the international economic policy uncertainty

Summary

Introduction

The response of financial markets to the global financial crisis of 2008/2009 (GFC) and the current coronavirus disease 2019 (COVID-19) pandemic echoed the impact of globalization on the financial market of developed and emerging markets. Economic and financial disturbance from one country, especially from the world’s leading economies, significantly impacts developing countries [1,2,3]. A typical example is the recent economic downturn and the US economic recession, which spread from the US housing market to the US financial market, leading to the global financial crisis. This reemphasizes the adage that “when America sneezes, the whole world catches a cold”. Policy instability or uncertainty could delay decision-making and adversely affect economies and price reactions in financial markets [4,5,6,7]. The reaction of African stock markets and the inability of most markets to return to pre-GFC is a confirmation of the difficulty in overshoot activities following uncertainty [8,9]

Methods

Results

Discussion

Conclusion