Commodities, Exchange Rates, And Equity Markets In Commodity-Dependent Sub-Saharan African Countries

Abstract

The transmission of risk across markets occurs when information flow is neither immediate nor complete. This infers that a market's response to adverse sentiment spreads to other markets, irrespective of the prevailing conditions. Accordingly, the global metal market encountered chaos in 2022, coupled with surges in commodity prices, and the IMF disclosed an escalated devaluation of currencies in sub-Saharan Africa. Amidst such occurrences, it becomes vital to acknowledge the potential transmission of risks within these markets, and this stems from the continent's heavy reliance on commodities and the close link between stock market performance and economic progress. By utilising the multivariate wavelet and the Barunik and Křehlík spillover index, this study examines the interdependence and volatility transmission among commodities, exchange rates, and equities in selected sub-Saharan African countries. The study utilised daily prices spanning 2012 to 2022 as a proxy for commodities and equities, with daily nominal indirect quotations proxying for the sample currencies. The study found weak interdependencies between commodity and equity markets in the short and medium term and a bidirectional risk transmission among all sampled markets in the long term. It is recommended that central banks and equity market regulators within these markets strengthen and implement robust risk management policies that take into account these linkages. It is further recommended that governments diversify the economy to ease the burden on commodities, improve production, and enhance value. This will reduce the region's susceptibility to commodity and currency market shocks and enhance economic growth and equity market development.