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International Stock Market Linkages


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  • K.R. Jefferis
  • T.T. Matome


Recent years have seen considerable attention devoted to analysis of linkages among stock markets in different countries. Much of the research was prompted by the nearly simultaneous world-wide collapse of equity markets in October 1987, which apparently provided evidence of strong linkages in the price movements of the major world stock markets. Interest in the topic has also been enhanced by the globalization of financial markets, the progressive relaxation of controls on international capital movements and the increasing importance of cross-border equity flows. In the financial economics sphere, three key questions arise about changes in international stock market linkages: first, what are the implications for the rapid international transmission of national financial disturbances; second, what are the implications of these trends for the efficiency of stock markets in different countries; and third, what are the implications of linkages between stock markets for the international diversification of equity portfolios? The internationalization of equity flows would appear to be accompanied by enhanced information flows, and hence greater market efficiency, while the removal of barriers between markets should lead to a tendency towards the equalization of the price of risk. However, if markets become more closely linked in the sense that there are stronger co-movements of prices across markets, then this may result in changes to optimal international portfolio diversification strategies. The issue of stock market linkages is also relevant from a policy perspective in an environment where moves towards greater regional economic integration are being promoted. Increased linkages between stock markets is a component of regional or international capital market integration, which is in itself important for the integration of the goods and services markets to be effective. Most of the research to date on international stock market linkages has been concentrated on the major world stock markets (US, Japan, UK and Germany), although there has also been some work on the smaller developed country markets and Asian markets (Hong Kong, Singapore, etc.). The Mexican crash of 1994/1995 and its apparent transmission to other Latin American markets, as well as the recent episode of seemingly rapid transmission of financial market disturbances across East Asia, may well prompt more research into linkages between emerging markets. We are not aware of any research into linkages among African stock markets, however, even though stock markets have been growing in importance in several African countries in recent years. In this paper, we investigate the extent of linkages among three stock markets in southern Africa, specifically Botswana, Zimbabwe and South Africa. We also consider the extent to which these markets are related to emerging markets more generally and to the larger international markets.

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Bibliographic Info

Paper provided by African Economic Research Consortium in its series Research Papers with number RP_105.

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Length: 52 pages
Date of creation: May 2001
Date of revision:
Handle: RePEc:aer:rpaper:rp_105

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Cited by:
  1. David G. McMillan & Pako Thupayagale, 2009. "The efficiency of African equity markets," Studies in Economics and Finance, Emerald Group Publishing, vol. 26(4), pages 275-292, October.


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