Return and volatility spillovers between South African and Nigerian equity markets

South Africa and Nigeria are the wo biggest African economies by the size of their economies, translated in their gross domestic product (GDP). Portfolio investors who are interested to invest in the African stock markets should be interested in uncovering whether the two stock exchange markets complement and provide the opportunity for asset diversification or that the two markets are strictly substitutable. It is in that context that this paper evaluates the cross-transmission of returns and volatility shocks between the two countries to infer the extent of interdependence of the two stock exchange markets. Moreover, the paper makes inferences on optimal portfolio weights and hedge ratios when holding assets from the two markets. To that end, estimations based on multivariate GARCH (general autoregressive conditional heteroscedastic) model are used. The results of the empirical analysis suggest evidence of stock market returns and volatility spillovers from South African stock markets to Nigerian stock markets , and not other way around. Moreover, the results suggest that it is ideal to constitute a portfolio and set an optimal hedge ratio by combining assets from the South African and Nigerian stock markets and that investors should engage in dynamic rebalancing of portfolio weights and hedge ratio.