Author
Listed:
- Babatunde Lawrence
- Fabian Moodley
- Sune Ferreira-Schenk
Abstract
This study provides evidence and proof of dynamic return connectedness alongside the revelation that certain macroeconomic factors determine the return connectedness of size-based industries of the Johannesburg Stock Exchange (JSE). The objective of this study is to examine the effect of COVID-19 on the connectedness of JSE size-based indices and to investigate the effect of macroeconomic variables on JSE size-based index connectedness under changing market conditions. By employing the time varying parameter vector autoregressive (TVP-VAR) model alongside the Diebold and Yilmaz Connectedness framework to examine the time-varying connectedness and using the Markov regime-switching model to determine the drivers of the return connectedness for the period from 4 January 2017, to 30 June 2023. The findings of this study demonstrated that the return connectedness of the JSE-size-based indices vary over time, especially in extreme market conditions such as the pre, during and post-Covid-19 periods. Moreover, the Covid-19 pandemic period reveals a season of high correlation; hence, a heightened co-movement in the returns of all JSE sized-based indices. Moreover, macroeconomic variables have an alternating effect on the connectedness of JSE sized-based indices during bull and bear market conditions. That is, the effect is regime-dependent and time varying. These findings have serious implications for portfolio diversification, in which portfolio rebalancing is needed during alternating market conditions.In recent years there have been problems in equity portfolio decision, formulation, and stability especially during economic turbulence. Hence making the task of investment portfolio formulation a difficult one. The size-based industries on the Johannesburg stock exchange (JSE) are eligible instruments that have the capacity to reflect the market performance of firms in each category (FTSE Russell, 2020), and hence capable to be used in enhancing portfolio decisions, formulation and further enhance return stability on the JSE. This is very important in turbulence periods such as the COVID-19 pandemic during which global and local economic activities was stalled, economic and financial uncertainties spiked and financial markets plunged, which led to global financial chaos that disturbed asset allocations. Hence this study used the sized-based industries on the JSE to establish possible correlations between them (JSE-LRG CAP, JSE-MID CAP, JSE-SML, and JSE-FLD industries) during extreme events that affected global economy such as the COVID-19 pandemic, and further investigates the macroeconomic factors that could determine their connectedness in different market conditions such as during the bullish or bearish regime of an economy.
Suggested Citation
Babatunde Lawrence & Fabian Moodley & Sune Ferreira-Schenk, 2024.
"Macroeconomic determinants of the JSE size-base industries connectedness: evidence from changing market conditions,"
Cogent Economics & Finance, Taylor & Francis Journals, vol. 12(1), pages 2397454-239, December.
Handle:
RePEc:taf:oaefxx:v:12:y:2024:i:1:p:2397454
DOI: 10.1080/23322039.2024.2397454
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