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Nowhere Left to Hide? Stock Market Correlation, Regional Diversification, and the Case for Investing in Africa

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  • Todd Moss and Ross Thuotte
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    Abstract

    Investors diversify their portfolios to boost returns and manage risk. However, the benefits of diversifying across geographic regions are reduced if markets are highly correlated. This paper examines trends over the past two decades and finds, as expected from global market integration, that regional indices have become increasingly correlated with the S&P 500 index. Sub-Saharan Africa is also part of this trend, but is a notable laggard. For instance, in 2010 the correlation with the S&P500 was 0.86 for markets in Latin America, 0.79 for Asia, and just 0.31 for sub-Saharan markets (excluding South Africa). Additionally, correlations among African markets are generally very low. While there remain barriers to exploiting this trend, Africa’s integration lag may present opportunities for investors seeking regional diversification—and policymakers seeking to attract greater portfolio investment to the continent.

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    Bibliographic Info

    Paper provided by Center for Global Development in its series Working Papers with number 316.

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    Length: 20 pages
    Date of creation: Mar 2013
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    Handle: RePEc:cgd:wpaper:316

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    Web page: http://www.cgdev.org

    Related research

    Keywords: international financial markets; portfolio choice; emerging markets; Africa; market correlation; stock markets;

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    1. Paul Alagidede & Theodore Panagiotidis, 2010. "Can Common Stocks Provide A Hedge Against Inflation? Evidence from African Countries," Koç University-TUSIAD Economic Research Forum Working Papers 1022, Koc University-TUSIAD Economic Research Forum.
    2. Alagidede, Paul & Panagiotidis, Theodore, 2009. "Modelling stock returns in Africa's emerging equity markets," International Review of Financial Analysis, Elsevier, vol. 18(1-2), pages 1-11, March.
    3. Harvey, Campbell R, 1995. "Predictable Risk and Returns in Emerging Markets," Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 773-816.
    4. Enisan, Akinlo A. & Olufisayo, Akinlo O., 2009. "Stock market development and economic growth: Evidence from seven sub-Sahara African countries," Journal of Economics and Business, Elsevier, vol. 61(2), pages 162-171.
    5. Emmanuel Anoruo & Luis Gil-Alana, 2011. "Mean reversion and long memory in African stock market prices," Journal of Economics and Finance, Springer, vol. 35(3), pages 296-308, July.
    6. Kenny, Charles J. & Moss, Todd J., 1998. "Stock markets in Africa: Emerging lions or white elephants?," World Development, Elsevier, vol. 26(5), pages 829-843, May.
    7. Keith Jefferis & Graham Smith, 2005. "The Changing Efficiency Of African Stock Markets," South African Journal of Economics, Economic Society of South Africa, vol. 73(1), pages 54-67, 03.
    8. Paul Alagidede, 2009. "Are African Stock Markets Integrated with the Rest of the World?," The African Finance Journal, Africagrowth Institute, vol. 11(1), pages 37-53.
    9. Appiah-Kusi, Joe & Menyah, Kojo, 2003. "Return predictability in African stock markets," Review of Financial Economics, Elsevier, vol. 12(3), pages 247-270.
    10. Flavin, Thomas J & Hurley, Margaret J & Rousseau, Fabrice, 2002. "Explaining Stock Market Correlation: A Gravity Model Approach," Manchester School, University of Manchester, vol. 70(0), pages 87-106, Supplemen.
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    1. The Upside of Down and a Positive-Sum World
      by charleskenny in Global Development: Views from the Center on 2014-01-07 17:39:06

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