Regime-Dependent Linkages Across South African Asset Markets and Commodities: Application of Markov-Switching Vector Autoregressive Model

Asset market comovements tend to increase during periods of market stress, reducing the effectiveness of traditional diversification strategies and challenging portfolio theory assumptions. The time-varying interdependence under different market conditions poses significant challenges for investors managing risk and policymakers formulating strategies. This study employs a Markov-Switching Vector Autoregressive (MSVAR) model to examine the regime-dependent linkages between asset markets and fills the gap in knowledge on comprehensive asset market linkages within South Africa. The results indicate that while shocks are transitory in bull markets, they persist for longer in bear markets. All asset markets respond significantly to shocks in the bear regime, suggesting a high level of contagion and reduced diversification opportunities. The foreign exchange market was identified as the main transmitter of risk to the other as-set markets in both regimes. In contrast, shocks emanating from the housing and commodity market were generally not significant. The findings confirm the flight-from-quality hypothesis, with investors preferring high-return assets, such as equities and oil, in bullish periods and safer assets during bearish periods. Bonds fail to act as a safe haven in crisis periods, while gold exhibited safe haven properties in the bear regime, consistent with the flight-to-quality phenomenon. These results have important implications for portfolio diversification and policy interventions. For investors, the ability to identify regime shifts allows for dynamic asset allocation strategies that adjust exposure depending on market conditions. Investors should shift their portfolios toward equities, housing and oil markets during bull periods to capture higher returns. For policymakers, understanding the nature and direction of shock transmission is critical for designing timely and targeted interventions to stabilize markets, such as implementing measures to contain disruptive fluctuations in the foreign exchange market, coordinating fiscal and monetary responses to preserve investor confidence, and developing macroprudential tools to mitigate risk spillover effects between asset markets during crisis periods.