SHOCK ABSORBERS OR AMPLIFIERS? CURRENCY SPILLOVERS AND LONG-MEMORY VOLATILITY IN EQUITY MARKETS IN AFRICA

Abstract

Abstract This research studies the transmission and spillover of the dollar (USD), Euro (EUR) and the pound (GBP) to Casablanca stock exchange (CSE), regional securities exchange (BRVM) and Nairobi securities exchange (NSE) from 1 January 2018 to 30 December 2026. This period is of special significance as this study encompasses the two most recent major global exogenous shocks, that is, the COVID-19 pandemic (2020) and poly-crises of high inflation and geopolitical fragmentation (2023-2024). In order to test the long memory properties of the volatility and the VAR-GARCH methodological framework, as well as the impulse response functions (IRFs) used to test the persistence and magnitude of currency-induced spillovers from the volatility shocks, we employ DCC-FIGARCH model framework. Long-memory behaviour in all three markets is indicated to exhibit substantially. Consequently, this rejects the weak-form efficient market hypothesis (EMH). The Kenyan economy, which boasts the highest persistence measure, d = 0.68, signals that shocks decline more slowly. The implications of the VAR-GARCH analysis indicate that there is a one-way spillover in volatility from the exchange rate to the stock market in Kenya. Specifically, a depreciation of the exchange rate crashes the valuation of the stock market. The coefficient is 0.35. BRVM’s spillover effects are insignificant according to the estimation results. This indicates that the Euro peg is a good firewall against contagion. The CSE and NSE each have hybrid resiliency. CSE can absorb shocks more readily than an NSE can. CSE has shown sensitivity to Euro-zone fluctuations. The NSE was suspected of being dollar-Satellite by Kirch. In other words, 2023 global tightening cycle, NSE sensitive to USD value fluctuations and capital flight. Conversely, Casablanca (CSE) and BRVM exchanges are of a Euro-Satellite profile. These operations respond massively to Eurozone stability but are a safe haven for shocks directed at the USD. The pandemic shock in 2020 was synchronized and symmetric, however, the multidimensional crisis on 2023–25 as asymmetric volatility transmission which recover market either with lower impact or with high external debt overexposure and was punished. Insights into these mechanisms will be critical to diversifying portfolios internationally and formulating policies. The East African market is distinct from West and North Africa, suggesting that risk management strategies should include a currency aware hedging strategy. The Friedmanite view suggests that flexible exchange rates are shock absorbers for developing countries. This finding contradicts it. The effects of shocks on countries like Africa that rely on imports get magnified due to floating rates. As per recommendations, the Frontier nations may maintain fixed exchange rates for the development of the equity market and protection against global financial contagion. JEL Classification: C58, F31, G15, G11, O55