The Dynamics of Volatility Spillover between African Stock Markets in the Context of Political Uncertainty: The Case of Nigeria and South Africa

Abstract

The economies of Nigeria and South Africa have, in the last decade and a half, been a significantly important destination for investment, chiefly because of their size, political and economic stability they enjoyed during the period. Investors have therefore come to regard the two economies as both complements and alternatives competing for their investible funds. There are, however, a number of political, economic and security challenges facing Nigeria, which have raised the political and economic uncertainty that such investors have to face. These events include the heightened political tension in the period running to the 2015 general elections, the rising terror attacks on people, properties and businesses by Boko Haram in the North East and Niger Delta insurgents in the South-South of Nigeria. South Africa has also experienced spates of violent civil uprisings. These events, being key determinants of (portfolio) investment could have an important implication on the level of investment flows between the two countries and, hence, the volatility dynamics of their respective stock markets. This paper tests the hypothesis that the volatilities introduced by these events have significant spillover effects between the Nigerian and South African Stock Markets. The paper, hence, first examines the impact of political uncertainty on the stock markets, and then examines the nature and dynamics of the volatility spillover between two African stock markets. The paper employs two multivariate GARCH model of Conditional Correlation (CC). Our main findings are as follows. First, by distinguishing between South African and Nigeria’s stock markets indices, it was found that investments in these two markets react heterogeneously to the political turmoil. Specifically, the paper documents a significantly high volatility in the two market returns; the CC of the volatility spillover between the two markets was found to be negative and statistically significant; that regardless of the impact of political uncertainty on the volatility spillover, there is little evidence to suggest that the two markets have become more integrated within the period. In general, these results are robust to model specifications and are consistent with the notion that political uncertainty (caused by corruption, bribery and misappropriation of resources) contributing to the significant financial volatility spillover. Overall, the findings are important in understanding the role of political uncertainty on stock market stability and are of great significance to investors and market regulators.