The literature on financial contagion is extensive across various regions. This link has been explored for advanced markets (see [12, 17, 22,23,24, 29, 32]), for Asian markets (see [2, 6,7,8, 30, 33]) and African markets (see [3, 5, 26, 27]).
Among the existing studies above, a number of empirical studies have revealed the existence of contagion in advanced markets. For instance, King and Wadhwani [23] tested for contagion in the stock markets of New York, London and Japan during the 1987 US market crash. Based on correlation coefficient, the analysis suggests that cross-market correlations increased significantly during the crisis.
Similarly, Masih and Masih [24] tested the relationship among six stock markets of developed nations (US, Japan, France, Canada, Germany and UK), before and after the stock market crash of 1987. It was found that the crash brought about a greater interaction among markets and evidence of a single co-integration vector over each of the pre-crash and post-crash samples.
Also, Missio and Watzka [25] examined financial contagion in a sample of seven (7) countries, namely Germany, Greece, Portugal, Spain, Italy, Netherlands, Belgium and Austria, between 2008 and 2010. The results indicated that there was occurrence of contagion in Portugal, Spain, Italy and Belgium.
In the same vein, Syllignakis and Kourectas [31] studied the emerging stock markets of Central and Eastern Europe for the period of 2007–2009, the results indicated that the emerging markets were exposed to external shocks with a substantial regime shift in conditional correlations.
Also, Corbet and Twoney [12] reveal the evidence of contagion mechanics attributed to herding behavior in European markets between 2007 and 2013 to the G7 countries’ market examined.
Tiwari et al. [32] found a short run correlation during the period of financial distress and co-movement among markets in the long run. However, Karanasos et al. [22] reported time-varying correlation and volatility spillover effects between the returns of markets examined.
In the case of emerging markets, Arestis et al. [2] tested for contagion in the four largest emerging markets of Asia, namely Thailand, Indonesia, Korea and Malaysia, against a set of developed markets, namely Japan, the UK, Germany and France (major lenders) during the 1997 East Asian crisis. Evidence of contagion was found between the major lenders to the emerging markets. This was attributed to the reduction in bank lending from the major international lenders.
Wang and Thi [33] examined the impact of Asian financial crisis on Chinese Economic Area (CEA) between 1992 and 2002. Conditional correlation coefficients were found positive, and co-movement existed among the Thailand and CEA markets. For all the markets, the variances were higher in the post-crisis period than in the pre-crisis period, indicating an evidence of contagion. Similarly, Chiang et al. [8] reveal the evidence of contagion effect from the Asian crisis of 1997 in Thailand, Malaysia, Indonesia, Philippines, South Korea, Taiwan, Hong Kong and Singapore from 1990 to 2003.The first phase of the crisis displaying a process of increasing correlations (contagion), while in the second phase investor behavior converged and correlations were significantly high (herding behavior) across the Asian countries.
In Africa, Collins and Biekpe [11] examined the existence of contagion between African equity markets and global emerging equity markets during the Asian crisis of 1997. Evidence was found that the larger and more integrated markets in Africa (Egypt and South Africa) suffered from contagion during the Hong Kong crisis of 1997.
Morales and O’callaghan [26] reports no evidence of contagion in 58 countries between 2003 and 2009. It was revealed that markets suffered mostly from spill over effects originating from the US.
Meanwhile, Bouri [5] reports a sudden increase in conditional volatilities during financial crisis and a dynamic conditional correlation of equity markets returns of 12 equity markets in MENA between 2005 and 2013.
Boako and Alagidede [4] examined the evidence of shift-contagion in African stock markets using conditional value at risk (CoVar) between 2003 and 2016. The study found that global shock propagation to developing markets stagger during the global financial crisis of 2007 but becomes more pronounced after the crisis.
Offiong et al. [27] examined financial contagion and its impact on the Nigerian stock market using the Bayesian VAR model in periods before, during and after the global financial crisis. The findings showed that that American and Chinese market negatively affected the Nigerian stock markets, with a pronounced effect as a result of the fall of the naira exchange rate.
Thus, the review of literature shows that studies exist on stock market linkages and financial contagion. Given the various methodologies and the different time frame adopted, these studies have largely reported inconsistent results. Only few of these studies reported can be linked to Africa as most of them have concentrated on Europe and Asian countries. This therefore calls for further investigation on the dynamic analysis of financial contagion in African stock markets.