Return transmission mechanism across South African and global banks: contemporaneous and lagged R2-decomposed connectedness approach

Abstract

Using the recently created contemporaneous and lagged R2-decomposed connectedness paradigm, this study examines the dynamics of return transmission between large South African banks and two top international banks, J.P. Morgan and BNP Paribas. The analysis makes a distinction between delayed (liquidity-driven) propagation mechanisms and instantaneous (information-driven) spillovers, using daily stock returns from 2015 to 2024. With a Total Connectedness Index of 44.14%, which is driven mostly by contemporaneous transmission, the results demonstrate a high degree of systemic interdependence and rapid assimilation of global information across banking stocks. We find smaller lagged spillovers which become much more intense during stressful events like COVID-19 in 2020, the conflict between Russia and Ukraine in 2022, and the banking instability involving the United States and Switzerland in 2023. These findings are conditioned by funding pressures, liquidity limits, and slow portfolio rebalancing. In the South African financial system, Standard Bank and Nedbank consistently act as net transmitters of shocks, whereas J.P. Morgan and BNP Paribas primarily act as net receivers, indicating asymmetric cross-border contagion pathways. However, their spillover transmission roles switch during crises. Overall, the results offer fresh empirical insight on how global shocks are absorbed and retransmitted by emerging-market banking systems, providing policy-relevant information for cross-border supervisory coordination, macroprudential design, and systemic risk monitoring.