African equity markets’ exposure to oil and other commodities - implications for global portfolio diversification

This paper examined the risk-return relationship and the correlation dynamics of African stocks relative to global factors. By applying both the static and augmented capital asset pricing model, as well as dynamic conditional correlation methodology to daily returns series from January 3, 2003 to December 29, 2014, we find evidence of conditional correlation between African stocks and global factors influenced by the global financial crisis. From the risk-return point of view, Egypt and South Africa, although dominant, show relatively weak risk mitigating opportunities. Their information ratios are highly anemic to internationally accepted thresholds. Despite this, international investors seeking to diversify via uncorrelated markets may consider Africa, albeit on account of volatility persistence, present and past market conditions, market stability, as well as size and liquidity considerations.