Abstract
M.Com. (Financial Economics)
This study evaluates the cross-transmission of returns and volatility between South African and Nigerian stock markets. To that end, an empirical model from the multivariate general autoregressive conditional heteroscedastic family is estimated. The results of the multivariate general autoregressive conditional heteroscedastic model suggest evidence of stock market returns and volatility spillovers from South African stock markets to Nigerian stock markets, whereas, the empirical results suggest no evidence of stock market returns and volatility spillovers from Nigerian stock markets to South African stock markets. The results also suggest that the correlation between South African and Nigerian stock markets is time-varying. The study also makes inferences on optimal portfolio weights and hedge ratios regarding holding South African and Nigerian stock market assets according to the Modern Portfolio Theory. The study infers that although investors should hold a larger proportion of South African stock market assets relative to Nigerian stock market assets in a portfolio on average, and that the cost of hedging a long position in the South African stock market with a short position the Nigerian stock market is relatively inexpensive, this not homogenous for single time periods. Thus, the study concludes that due to the dynamic correlation between South African and Nigerian stock markets, investors should engage in dynamic rebalancing of portfolio weights and hedging to achieve optimal portfolio weights and hedge ratios.