Financial Contagion Effect and Investor Behavior in African Financial Markets During the 2007–09 Global Financial Crisis

This paper examines contagion effect on 10 African financial markets. These markets can be considered risky as they carry additional political and economic risks. They are also a lot less integrated with the US as depicted in financial integration literature. A consequence of this is that African financial markets, generally have much lower correlations with the US market. The distinguishing characteristic of the 2007-09 crisis is its long nature characterised by a series of sub-shocks. The insight that this paper gives is that, a multiple-event crisis that consists of a series of shocks, leads us to examine contagion as a series of events. Using correlation coefficient analysis, evidence of contagion is found in different crisis periods which mostly disappeared following the adjustment for heteroscedasticity bias. Our results do point to investors’ herding behaviour as the main driving force for contagion in our sample.