The volatility spillover effect of a dual–listed stock for international markets

Abstract

The 2008 financial crisis caused a great increase in volatility in world stock markets, creating the need to develop alternative diversification strategies to minimise decreasing portfolio value. This study proposes a possible diversification instrument, which utilises the dual–listed stock price volatility in the London Securities Exchange (LSE) to determine Johannesburg Securities Exchange (JSE) stock price movements. This implies that the ability to determine possible buy opportunities on the JSE can be identified by examining volatility movements on the LSE. By using the price differences in the Anglo American Plc. dual–listed stock prices on the LSE to measure the volatility spillover impact on the JSE, evidence of both co–movement and volatility spillover effects between the two markets was found. The evidence indicates that the LSE does have an influential effect on the JSE, which justifies the use of LSE dual–listed stock price movements as a partial indicator for determining JSE dual–listed stock price movements. This study illustrates the possibility of exploiting the volatility spillover effects between international markets to enhance international portfolio diversification in times of great market fluctuations.