Quantile - Asymmetric Return Connectedness and Investment strategies on African Stock Markets

A significant increase in investment into the African emerging markets has occurred. This flow of investment associated with the low correlations return between the asset class of stock market has attracted global investors in terms of returns opportunity and low portfolio risk. This thesis attempts to shed light on the linkage and connectedness of the emerging African stock markets as well as presenting the opportunity those markets may offer investors for international portfolio diversification. A dataset from twelve African stock markets that spanned January 2007 to December 2023 were analysed to present the dynamics of African markets connectivity as well as their asymmetries. The findings should provide some insights on shock transmission between the markets as well as hedging effectiveness. The thesis analysis begins by conducting the quantile connectedness approach of Chatziantoniou et al (2021) to examine the inter-relationships between the African markets, in order to determine their time-varying potential. The results of this analysis suggest that in the bearish market phase, the network in the normal, short term and long term is mostly dominated by South Africa transmitting shocks to the remaining stocks. In the bullish phase of the market, South Africa still dominates the market as a major net transmitter of shock in the normal and long term. In the short term, shock transmission is dominated by Kenya. In both the bear and bull market phase, Uganda receives the most shocks from other countries. At the median quantile, both Namibia and South Africa influence the network and Ugandan stock market receives the most shocks. The second part of the thesis builds upon these results and investigates the asymmetry between the African stock markets. In so doing, the methodology of the asymmetric dynamic connectedness approach is based on the time varying parameters VAR model of Antonakakis et al (2020). The result from the analysis demonstrates the presence of asymmetry between the variables and a dominance of positive return connectedness. Second, portfolio testing analysis will be performed based on the study from Broadstock et al (2020) to construct the minimum connectedness portfolio technique from the result analysis and compare it with two conventional techniques. The findings from this analysis suggest that the minimum connectedness portfolio has the upper hand in allocation purpose and based on the Sharpe ratio, suggest that the minimum connectedness approach is the most profitable among the three techniques and is ranked either first or second.

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Publication Details

Journal
Discovery
Published
2025-11-09
DOI
https://doi.org/10.15132/20000736
Primary Topic
Financial Risk and Volatility Modeling
Type
article
Field-Weighted Citation Impact
0.00
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article

Quantile - Asymmetric Return Connectedness and Investment strategies on African Stock Markets

Discovery
Financial Risk and Volatility Modeling
article

Quantile - Asymmetric Return Connectedness and Investment strategies on African Stock Markets

article en

Abstract

A significant increase in investment into the African emerging markets has occurred. This flow of investment associated with the low correlations return between the asset class of stock market has attracted global investors in terms of returns opportunity and low portfolio risk. This thesis attempts to shed light on the linkage and connectedness of the emerging African stock markets as well as presenting the opportunity those markets may offer investors for international portfolio diversification. A dataset from twelve African stock markets that spanned January 2007 to December 2023 were analysed to present the dynamics of African markets connectivity as well as their asymmetries. The findings should provide some insights on shock transmission between the markets as well as hedging effectiveness. The thesis analysis begins by conducting the quantile connectedness approach of Chatziantoniou et al (2021) to examine the inter-relationships between the African markets, in order to determine their time-varying potential. The results of this analysis suggest that in the bearish market phase, the network in the normal, short term and long term is mostly dominated by South Africa transmitting shocks to the remaining stocks. In the bullish phase of the market, South Africa still dominates the market as a major net transmitter of shock in the normal and long term. In the short term, shock transmission is dominated by Kenya. In both the bear and bull market phase, Uganda receives the most shocks from other countries. At the median quantile, both Namibia and South Africa influence the network and Ugandan stock market receives the most shocks. The second part of the thesis builds upon these results and investigates the asymmetry between the African stock markets. In so doing, the methodology of the asymmetric dynamic connectedness approach is based on the time varying parameters VAR model of Antonakakis et al (2020). The result from the analysis demonstrates the presence of asymmetry between the variables and a dominance of positive return connectedness. Second, portfolio testing analysis will be performed based on the study from Broadstock et al (2020) to construct the minimum connectedness portfolio technique from the result analysis and compare it with two conventional techniques. The findings from this analysis suggest that the minimum connectedness portfolio has the upper hand in allocation purpose and based on the Sharpe ratio, suggest that the minimum connectedness approach is the most profitable among the three techniques and is ranked either first or second.

Discovery
University of Dundee (GB)
Openalex Percentile: Top 35%
Financial Risk and Volatility Modeling
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