Abstract
Since the 1990s the level of global financial market integration has expanded considerably. The rising globalisation of investment in pursuit of higher rates of return and the potential to spread risk globally has been a fundamental driver underpinning this development. Numerous nations have simultaneously embraced capital inflows by removing barriers, liberalising their local financial markets, enhancing economic environments, and putting market-oriented policies in place.
The integration of financial markets is essential for macroeconomic policies, price discovery, and portfolio diversification, although it also accelerates the spread of financial crises. Access to international capital markets increases an investor's ability to diversify their holdings and offers the chance to realise higher rates of return after adjusting for risk, and prohibits the adoption of independent monetary policies by monetary authorities. Furthermore, it enables countries to borrow to stabilise consumption in the face of unfavourable shocks, potentially significantly improving the economy. In developing economies, a significant structural development is opening local financial markets to international investors and institutions. Owing to the potential for greater earnings, foreign investors now view emerging financial markets as a potential investment option for international portfolio diversification. This is due to emerging countries who are currently liberalising their economies.
This study assesses cross-asset contagion in South Africa across multiple asset markets: equities, bonds, commodities, and foreign exchange rates. Weekly returns are used to determine contagion between the chosen asset markets, and data spans from 8 October 2004 to 29 July 2022. This study uses a dynamic conditional correlation generalised autoregressive conditional heteroscedasticity (DCC-GARCH) model to assess correlation among asset markets. The study further applies a T-copula to measure asset market dependence, highlighting the joint movement of returns during normal and crisis conditions. Using the DCC-GARCH model and the T-copula model, this study finds evidence of contagion for most asset markets throughout the global financial crisis in 2007/8 and COVID-19.