The paper evaluates the cross-transmission of returns and volatility shocks between Nigeria and South Africa stock markets to infer the extent of interdependence between the two markets. The paper also makes inference to optimal portfolio weights of holding assets in the two markets.
The paper uses an asymmetric vector autoregressive-exogenous generalised autoregressive conditional heteroscedasticity (VAR-X GARCH) model to assess the extent of returns and volatility spillovers between Nigeria and South Africa.
The results of the empirical analysis show evidence of shock spillovers from the South African stock market to the Nigerian stock market. Moreover, based on the dynamic Sharpe ratio and portfolio weight optimisation, the results indicate the possibility of portfolio diversification when holding simultaneous positions in the two stock markets.
The results imply the possibility of economic profit for investors who take positions in the two stock markets. The lack of synchronisation of stock markets in the two largest economies in Africa is in contrast with the situations in other regions where stock markets returns of large economies often co-move.
The paper is the first to use the asymmetric VAR-X GARCH model to assess the cross-transmission of shocks between stock markets.
