The moderating role of major global shock events and policy effects on African frontier currency and stock market relationships

Abstract

The study investigates the relationship between stock and currency markets in African frontier economies in response to global shock events and policy changes. Using the Dynamic Conditional Correlation (DCC) GARCH model, cross-wavelet coherence (WTC) and partial wavelet coherence (PWC), the study examines volatility persistence, interdependence and spillover effects between these markets using daily data from January 2010 to March 2023. The results show that stock and currency markets in African frontier economies exhibit high volatility persistence, and that financial contagion increases with global integration. Findings suggest that external shocks, such as COVID-19, Brexit and the Russia-Ukraine conflict significantly impact market relationships, although the effects vary across countries. Furthermore, policy changes, such as the transition from Millennium Development Goals (MDGs) to Sustainable Development Goals (SDGs), exhibit moderate but lasting influence on market behavior. The study highlights the need for institutional development to mitigate contagion risks and enhance investment stability in African frontier markets.