Regional and global shock spillovers to Africa’s equity markets: evidence from the global financial crisis and COVID-19 pandemic

This study investigates the transmission of both regional and global shocks to domestic African equity markets during the 2008–2009 Global Financial Crisis (GFC) and the COVID-19 pandemic, aiming to address two key research questions: (1) Do regional African markets and global markets transmit significant shocks to local African markets?, and (2) Do regional markets in Africa transmit their own shocks, or do they intercept shocks from global markets? Using an asset pricing model, we analyze shock transmission across four periods: pre-GFC, during-GFC, post-GFC, and during-COVID-19. The findings reveal that regional markets, particularly in Southern and North Africa, transmitted significant shocks to local markets, with South Africa and Nigeria being more sensitive to regional shocks than other African markets. Regional markets were also found to serve as conduits for global shocks, indicating that both their own shocks and external shocks from global markets impacted domestic markets. The results underscore that African markets were more affected by regional than global shocks, suggesting stronger regional linkages possibly driven by regional economic integration, intra-regional trade, and sectoral interconnections. The study recommends that policymakers design integration policies that promote trade cooperation and financial stability, while simultaneously implementing safeguards to minimize the risks of volatility spillovers. These safeguards could include creating regulatory frameworks to monitor cross-border financial activity and prevent excessive risk exposure. Additionally, cross-border regulatory coordination should be strengthened, and risk management strategies such as hedging and portfolio diversification should be encouraged, both at the market level and among individual investors, to protect the real sector from external shocks.