Quantile Connectedness Between African Stock Markets and Quadruple Policy Uncertainty: Regime-Dependent Spillovers Across Geopolitical, Oil, Energy, and Climate Risks
This study utilizes Quantile Vector Autoregression and R²-based connectedness models to demonstrate that seven major African stock markets are deeply integrated with global geopolitical, oil, energy, and climate policy uncertainties, revealing that these spillovers are asymmetric and regime-dependent, with geopolitical and oil risks acting as dominant shock transmitters while specific African markets like NSE, DSE, and CSE serve as net transmitters amidst varying market conditions.
Original paper licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). This is an AI-generated explanation of the paper below. It is not written by the authors. For technical accuracy, refer to the original paper. Read full disclaimer
Imagine the world's financial system as a massive, bustling neighborhood where every house, shop, and park is connected by invisible wires. In this neighborhood, "stock markets" are like the local shops where people buy and sell pieces of companies, while "uncertainty" is the weather that can suddenly turn stormy. Sometimes the storm is a fight between countries (geopolitical risk), sometimes it's a sudden change in how much oil costs (oil price uncertainty), and sometimes it's a debate about how to power our future without hurting the planet (climate and energy policy uncertainty). For a long time, people thought the shops in Africa were like cozy, insulated cabins far away from the main stormy streets, safe from the big global winds. But as the neighborhood grew more connected, those cabins started feeling the tremors just as much as the big skyscrapers. This paper dives into that neighborhood to see exactly how the weather in one part of town affects the shops in another, and whether the shops themselves can actually start the storm.
The researchers, David Korsah and Seth Kwadwo Danso, decided to test this by looking at seven major African stock markets—like the big shops in Cairo, Johannesburg, Nairobi, Lagos, Casablanca, Ghana, and Dar es Salaam—and comparing them to four types of global "weather reports": Geopolitical Risk, Oil Price Uncertainty, Energy Policy Uncertainty, and Climate Policy Uncertainty. They didn't just look at the average weather; they used a special tool called a "Quantile Vector Autoregression" (QVAR) to check what happens during the worst storms (bearish markets), the calmest days (normal markets), and the most exciting, sunny festivals (bullish markets). They also used a "R²-decomposed" method to see if the shock happens instantly (like a lightning strike) or if it takes time to travel (like a slow-moving fog).
Here is what they found, and it turns out the story is more like a game of musical chairs than a one-way street. First, they discovered that the idea of African markets being "decoupled" or insulated from the rest of the world is mostly wrong. Instead, these markets are deeply tangled in the global web. But the direction of the shock changes depending on the mood of the market. When the market is in a panic (a bearish regime), the African stock markets actually act as the ones sending the shockwaves out to the rest of the world. Specifically, the markets in Nairobi (NSE), Dar es Salaam (DSE), and Casablanca (CSE) become the loudest voices, pushing their stress onto the global uncertainty indices. In this scary scenario, the global uncertainty reports like Climate Policy Uncertainty act more like sponges, soaking up the stress coming from the African shops. However, Geopolitical Risk is different; even during these downturns, it maintains its role as a sender, pushing shocks to the markets rather than just absorbing them.
However, the plot twists when the market is happy and booming (a bullish regime). In these sunny times, the global uncertainty reports, particularly Oil Price Uncertainty and Geopolitical Risk, become the ones sending the shocks to the African markets. It's as if the global weather reports start shouting, and the African shops have to listen and react. Interestingly, the Climate and Energy policy uncertainties tend to be the quiet listeners, mostly receiving shocks rather than sending them, regardless of whether the market is happy or sad.
The researchers also looked at the timing of these shocks. They found that some shocks happen instantly, like a sudden shout that everyone hears at the same time (contemporaneous spillovers), while others take time to travel, like a rumor that spreads slowly through the neighborhood over days or weeks (lagged spillovers). The instant shocks are mostly driven by the African markets talking to each other and to the global uncertainty indices. The slower, lagged shocks, however, show a strong conversation between Energy Policy and Oil Price uncertainties, suggesting that once a decision is made about energy or oil, it takes time for the ripple effects to settle in.
One of the most consistent characters in this story is Egypt's stock market (EGX). No matter if the market is crashing, normal, or booming, Egypt consistently acts as a "net receiver," meaning it absorbs more shocks than it sends out. It's like a house that always gets hit by the wind, no matter which way the storm is blowing. On the other hand, markets like South Africa's Johannesburg (JSE) and Nigeria's Lagos (NGX) often act as net receivers, absorbing stress rather than amplifying it, particularly during bullish and overall market conditions.
The study suggests that this isn't a solved puzzle, but a clear map of how the neighborhood behaves. The authors are careful to note that their findings are based on data from January 2007 to February 2024, and while the patterns are strong, they are observing correlations rather than proving a single cause-and-effect chain. They also point out that because they used monthly data, they might have missed some very fast, split-second reactions that happen within a single month. Furthermore, the "weather reports" they used are based on news from developed countries, which might not perfectly capture every local nuance in Africa.
Ultimately, the paper paints a picture of a financial neighborhood that is far more connected and reactive than previously thought. It suggests that during crises, African markets can actually drive global anxiety, while during booms, global oil and political tensions drive African markets. For the people running the shops (policymakers) and the people buying the goods (investors), the lesson is that you can't use the same rulebook for every day. You need a different strategy for stormy days, sunny days, and the slow-moving fog in between, because the wind blows from different directions depending on the season.
Drowning in papers in your field?
Get daily digests of the most novel papers matching your research keywords — with technical summaries, in your language.