Commodities Price Cycles and their Interdependence with Equity Market
Date
2021-08-27
Authors
Boako, Gideon
Alagidede, Imhotep Paul
Journal Title
Journal ISSN
Volume Title
Publisher
African Economic Research Consortium
Abstract
This study examines time-scale connectedness between returns on African stock
markets and commodities across the energy, agriculture, metals, and beverage
markets with wavelet-based coherency, wavelet multiple cross-correlation, and
wavelet-based Sharpe ratio and generalized Sharpe ratio diversification analysis. We
find evidence of increased performance of risk-minimizing portfolios during crisis
that are broadly narrowed to long-run fluctuations (shorter scales). Such higher
performances at shorter scales suggest that, during crises, investors show some
levels of risk-aversion towards African equity investments over long term horizons.
This explains why some African markets experienced first-round effect of the global
financial crisis despite the theoretical view that African economies could potentially be
decoupled from global economic shocks during crisis. Thus, although the decoupling
phenomenon may hold for African markets during global financial crisis, if investors
decide to balance their portfolios only for the short term, the portfolio reversals may
cause serious effects to the continent. Further, of all the nine stock markets, it is only
the Ivory Coast regional bourse that maximizes the multiple correlations against the
linear combinations of the aggregate commodity indices. Lastly, the results confirm
that having a combined portfolio of commodities and equities improves performance
for different investment horizons.
Description
Keywords
Commodities markets , Co-movements , ; Multiscale analysis , Wavelet