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Contagion across Financial Markets during COVID-19: A Look at Volatility Spillovers between the Stock and Foreign Exchange Markets in South Africa

Author

Listed:
  • Chevaughn van der Westhuizen

    (University of Pretoria)

  • Renee van Eyden

    (University of Pretoria)

  • Goodness C. Aye

    (University of South Africa)

Abstract

The onset of the novel coronavirus pandemic (COVID-19) and previous crises have heightened interest in the interaction of stock market and exchange rate volatility. This paper aims to investigate the inter-dependence and volatility transmissions between the stock and foreign exchange markets for South Africa over the period 1979:01—2021:08, including the effect the COVID-19 pandemic has had on the interdependence and transmissions. Using bivariate Exponential Generalised Autoregressive Conditional Heteroscedasticity (EGARCH) modelling, this paper provides strong evidence in support of the “stock-orientated’ approach, where significant price and volatility spillovers propagate from the stock market into the foreign exchange market; whilst evidence of the “flow-orientated” approach is seen in the second moment and significant shock and asymmetric spillovers from the exchange to stock market are found. The results support the asymmetric and long-range persistence volatility spillover effect and show strong evidence of contagion between stock and foreign exchange market. These spillovers became more pronounced during the COVID-19 pandemic, confirming heightened contagion during periods of crisis. The results heed important implications for not only policymakers who are concerned by the contagion and better regulation of these markets, but also for investors and fund managers who seek to hedge investment risks in South Africa.

Suggested Citation

  • Chevaughn van der Westhuizen & Renee van Eyden & Goodness C. Aye, 2022. "Contagion across Financial Markets during COVID-19: A Look at Volatility Spillovers between the Stock and Foreign Exchange Markets in South Africa," ERSA Working Paper Series 42, Economic Research Southern Africa.
    • Handle: RePEc:rza:ersawp:42
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    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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