Interdependence structure of global commodity classes and African equity markets: A vector wavelet coherence analysis

Commodity and African stock markets are capable of producing safe returns when needed. However, the high commodity price volatility coupled with commodity financialisation suggests that the fundamental characteristics of commodity returns may change. The probable situation with commodity returns is no different from those of equity returns from Africa, owing to the new trade liberalisations between African markets which signal plausible high cross-market integration. These developments could render diversification extinct and warrant that timely assessments are made to ascertain the dynamic interdependencies between these markets. Using the vector wavelet coherence approach, we examine the multiple, quadruple, and n-dimensional interdependencies between the returns on global commodities and African equity markets. Our findings from a time-frequency paradigm divulge dynamic interdependence between the various commodities and equity returns from Africa. We report high interdependence in the short-term with the degree being commodity-dependent. Our analysis – which covers commodities from energies, precious metals, grains, and softs – produces findings that have significant implications for market regulation, asset allocation, and portfolio management.