International Stock Market Linkages in Southern Africa

Stock markets are taking on an increasingly prominent role in financial development, and many developing and transition economies are establishing stock markets as part of financial reform processes. In theory stock markets can contribute to the mobilisation of savings and the allocation of investment, but there are questions as to whether this works in practice. One important issue is whether stock markets are efficient (in the financial sense), and a related question is whether share prices reflect economic fundamentals; both of these questions are important in addressing whether stock markets properly allocate capital. Another issue relates to the question of international linkages between markets: with greater integration of capital markets globally, financial market developments appear to be rapidly transmitted between markets around the world. While this can have beneficial impacts, in terms of improving the global allocation and pricing of capital, it may be disruptive if international capital flows are large relative to national markets and economies. This paper addresses pertinent issues in the context of stock markets in three southern African countries: Botswana, Zimbabwe and South Africa