African Financial Markets

A Spillover Analysis of Shocks

Background paper to the ERD2009


Giorgia Giovannetti – ERD Team Leader, Dipartimento di Economia, Università di Firenze, and European University Institute, San Domenico di Fiesole
Margherita Velucchi – Dipartimento di Statistica “G. Parenti”, Università di Firenze


Paper prepared for the Conference on “Moving Towards the European Report on Development 2009”, organised by the European Report of Development in Florence, Italy, 21-23 June, 2009


Two new facts related to emerging African financial markets have recently attracted attention: African financial markets are becoming an interesting and profitable alternative to diversify investment risk; and China, the UK and the US are increasingly influential in Africa. Focusing on the volatility of financial markets, this paper analyses the relationships between developed markets (US, UK and China) and some SSA emerging markets (Kenya, Nigeria and South Africa) in the period 2004-2009 using a Multiplicative Error model. We model the dynamics of the volatility in one market including inter-actions from other markets, and we build a fully inter-dependent model. Results show that South Africa and China have a key role in all African markets, while the influence of the UK and the US is weaker. Developments in China turn out to be (fairly) independent of both UK and US events. We also derive impulse response functions with a time dependent profile to describe how a volatility shock from one market may propagate to other markets. With the help of graphical presentation, we show how recent turmoil hit African countries, increasing the fragility of their infant financial markets.

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