ABSTRACT
We adopt the asymmetric dynamic conditional correlation (ADCC) multivariate GARCH model to examine stock market co-movements between South Africa and its five major trading partners: China, India, Japan, Spain, and the UK. Using weekly data from July 1, 1997 through June 30, 2008, we find that the correlations are time-varying and mean-reverting. The volatility is generally persistent across all market pairs. The bivariate correlations between South African stock returns and the returns of each trading partner are positive. This implies that all the stock returns are exposed to common macroeconomic conditions. The empirical results also suggest the existence of asymmetric conditional correlations. The ADCC results also indicate high correlations between the South African stock market and the markets of its trading partners. The estimated conditional volatilities of pair-wise return series tend to evolve more rapidly due to substantial effect of past volatility than the return innovations. This is very helpful for portfolio managers and investors to implement active investment strategies based on long-run persistence and the current information shocks.
Keywords
Time-Varying Correlations, Stock Market Co-Movements, ADCC-MGARCH Model