China–Africa financial markets linkages: Volatility and interdependence

• Published in: Journal of policy modeling 2018-11, Vol.40 (6), p.1140-1164
• Main Authors: Ahmed, Abdullahi D., Huo, Rui
• Format: Article
• Language: English
• Subjects: China–Africa; Financial markets; Multivariate GARCH; Volatility spillovers
• ISSN: 0161-8938; 1873-8060
• DOI: 10.1016/j.jpolmod.2018.05.002

The China–Africa relationship has blossomed in recent years and the scale and scope of Chinese engagement and investment in the latter have expanded enormously in the last decade. The purpose of this paper is to analyse the dynamic linkages and volatility transmission mechanisms between Chinese and African stock markets in recent years while highlighting the relative importance of Chinese capital flows and investments. We utilise dynamic forecasting models including Bayesian VAR and BEKK GARCH to estimate both price and volatility behaviours of Chinese and 15 selected African stock markets. Our empirical results indicate strong evidence of spillover effects in terms of both price movement and volatility behaviour, implying that Chinese and African stock markets are showing signs of integration. For price movement, bidirectional feedback relationships between Chinese and most of the African stock markets are observed, suggesting that both Chinese and African stock markets could influence each other. China has been building a strong African partnership and, therefore, increasing its trade and investment influences in the region. Examining volatility transmissions, at least one spillover effect (shock and/or volatility) from China to most of the African stock markets is reported. This suggests that the Chinese stock market now plays an influential role across African stock markets given that it has major investments in 46 out of 54 countries. Our findings show important portfolio management implications as a surge in Chinese investments provide new portfolio diversification opportunities for international investors. Policy-wise, we believe further market-oriented reforms and carefully designed and long-term development policies are required to boost capacity for development and achieve sustainable trade and growth.