Interlinkage of Johannesburg Stock Exchange Super Sectors During Extreme Market Events

The analysis of equity sectors correlation or equicorrelation has become important given the recent extreme market events. Equicorrelation is defined as a state where the average of the conditional correlations is equal to the average of all paired correlations. This study determined the correlation of the Johannesburg Stock Exchange (JSE) super sectors during extreme market conditions, namely the global financial crisis (GFC), the European debt crisis (EDC), the recent US-China trade war and the COVID-19 pandemic. The study analysed the daily returns of 16 JSE super sectors for the 2008-2021 period by applying the novel dynamic equicorrelation (DECO) GARCH model in the full sample and rolling windows. Firstly, the results of the analysis showed that the dynamic equicorrelation of the super sectors is high and positive in absolute form, an indication of high contagion among the super sectors. Secondly, the rolling window analysis indicated that equicorrelation is time-varying and higher during market distress than during a normal period. Thirdly, the highest correlation is observed during the EDC followed by the COVID-19 pandemic, the US-China trade war and GFC respectively.