Commodities Price Cycles and their Interdependence with Equity Markets in Africa
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Date
2020-11-15
Authors
Boako, Gideon
Alagidede, Imhotep P.
Journal Title
Journal ISSN
Volume Title
Publisher
African Economic Research consortium
Abstract
This study examined 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 crosscorrelation analysis, 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.