Abstract
This study used monthly data for 12 African countries from 2014 to 2019 to investigate whether the credit ratings associated with sovereigns spill over onto stock markets. A static and dynamic Spatial Durbin Model (SDM) was used to analyse the influence of credit rating on stock prices. The study controls for key macroeconomic indicators, including GDP growth, interest rates, and inflation rates. In the long run, improvements in the credit rating have a negative effect on local stock market returns. More importantly, it is clear across the estimates that the direct effects of the credit rating on the stock market returns are greater than any of the variables. It suggests that, in African countries, credit rating accounts for more fluctuations in stock markets than fundamentals. Spillover to neighbouring countries’ stock markets is sizably smaller in the short run compared to the long run. By comparing the dynamic short-run and long-run spillover effects, it is evident that an improvement in the neighbouring countries’ GDP growth, interest, inflation, and credit rating in the short run has a detrimental impact on local countries’ stock market. However, in the long run, an improvement in neighbouring countries’ GDP growth, interest, inflation, and credit rating will improve the long-term stock market returns of the local country. Akin to the estimates of the direct effects, the credit rating’s spatial spillover onto stock market returns has the greatest impact relative to the other variables. As expected, the local country benefits from short-run adjustments in macroeconomic variables, while neighbouring countries benefit from long-run adjustments. The empirical findings suggest the presence of spatial spillovers amidst African asset markets. The marginal effects from both non-dynamic and dynamic SDM indicate that credit rating has the greatest absolute impact on stock market prices – whether direct or indirect – and for both the short run and long run. Based on the macroeconomic variables included in the study, interest rates and inflation rates had a greater spillover contribution to the stock market prices than economic growth. The results reflect the importance of accounting for sovereign credit ratings across African countries when analysing stock market development. It is critical to understand the extension of policies beyond the concern of a country-specific macroeconomic ii goal, but instead consider trade linkages and economic events in countries surrounding each other.
M.Com. (Financial Economics)