African Stock Markets

This study investigates daily stock market anomalies in the African stock markets, using two most representative stock index ETFs, each over at least eleven-year time period spanning from pre-financial crisis era to ten years into the financial crisis. This research attempts to test the presence of the weekend effect on stock returns in the African stock exchanges during the financial crisis. The results indicate a significant negative effect on Mondays. Our results shed some light on the degree of market efficiency in one of the major emerging capital markets in the world.

Besides, African capital markets provide advantage of portfolio diversification in the sense that these markets are either lowly or negative correlated with major international capital markets of USA and Western Europe. Alagidede (2008) indeed showed on average that the correlation between monthly equity returns of African stock markets and the major international markets is 14%. This demonstrates a weaker relationship. He went on to show that African stock markets are characterised by weaker correlation with one another. Besides, the attractiveness of African stock markets to international investors is the advantage of potential gains from international portfolio diversification. Although table 4 and 5 point out some key indicators of underdeveloped equity markets, African stock markets have been growing at a faster rate hence its attractive to significant number of investors essentially along the lines of its potential benefits of international portfolio diversification. Relatively, African stock markets continue to perform well in terms of return on investment compared to the other emerging markets and the major international capital markets. In 2004, for example, Ghana stock exchange was considered the best performing equity market in the world as it recorded 144% growth in terms of US dollar, compared to the 30% growth by Morgan Stanley Capital International Global index (Databank Group Ghana, 2004). Likewise, the Egyptian market has grown more than five times following the reform of the Egyptian economy since July 2004. Zimbabwe stock exchange was among the best performers in the world even after adjusting for hyperinflation. (Irving, 2005)

Daily closing prices of the all-share index for each market were obtained from the I-net Bridge database. Namely, the JSE All-Share Index, Nigerian All-Share Index, MASI index for Morocco, Zambian All-Share Index and the Botswana All-Share Index were used. Papers, such as Dicle and Levendis (2010), have suggested that day- of-the-week effects have become less pronounced/disappeared in broader market indicators such as All-Share Indices. However, this paper still uses these measures; as in many recent African studies and they have still returned positive results. Following Smith, Jefferis, and Yhoo’s (2002) classification of African stock markets, this paper examines the following four markets: 1) South Africa, 2) medium-sized markets, 3) small new markets experiencing rapid growth, and 4) small new markets. Nigeria and Morrocco represent the medium-sized markets, Botswana represents a rapidly growing small market, and Zambia represents small markets with a strong growth potential. Although this classification may arguably be outdated, this study utilises it only for selecting these five stock markets. Apart from distinct market structure, these markets were chosen because of their geographical dispersion, enabling us to draw cross-sectional conlcusions from the study. Data for these stock markets is also readily available for the time period under investigation.

This paper examines the relative importance of the global and regional markets for financial markets in developing countries, particularly during the recent turmoil in global financial markets. In particular, we investigate the return transmissions in seven African stock markets (Egypt, Mauritius, Morocco, Namibia, South Africa, Tunisia, and Zambia) from September 2004 to March 2013 using the spillover indices based on the forecast error variance decompositions from a generalized impulse response function introduced by Diebold and Yilmaz (2012). The return spillovers of African stock markets are estimated to assess the degree of intra-regional financial interdependence. In addition, we examine the way in which the degree of regional (seven African markets combined), global (Europe: France, Germany, and the UK; non-Europe: China, Japan, and the US), commodity (gold and petroleum), and foreign exchange rate (Euro NEER and USD NEER) transmissions to individual African countries evolves during the US sub-prime crisis and the European sovereign debt crisis.

In our work, we want to see whether all the measures taken by the financial authorities tend to integrate African stock markets. This could be the cause of this financial market which continues to grow despite the various global crises. First, we use the Maximal Overlap Discrete Wavelet Transform (MODWT) on the different stock markets returns. These methods allow to data from financial markets to be available at different time scales. Then, we employ the Wavelet multiple correlation and the Wavelet multiple cross correlation proposed by Fern´ andez-Macho (2012), to study the relationship between the African stock markets. After, we apply the Diebold and Yilmaz (2012) spillovers index to data to determine the spillovers from the African financial markets towards the African financial markets themselves at different scales. Our study period is very interesting for the analysis of the relations between financial markets. It covers the last two financial crises, U.S financial crisis

The last three decades has witnessed a rapid increase in the number and size of African stock markets. However, their fragmented existence and lack of economies of scale and operational efficiency render most of them extremely illiquid, small and on the fringes of the competitive global financial markets place. Consequently, their informational efficiency is greatly diminished, and this severely affects their ability to allocate capital efficiently. With a specific focus on the weak-form of the efficient markets hypothesis, we have attempted to empirically ascertain whether African continent-wide share price indices distributional properties differ from their national counterparts. First, our findings generally suggest that the 8 African continent-wide share price indices returns display better normal distributional properties than any of the 8 individual national stock price indices studied. Second, we find evidence of statistically significant improvements in the informational efficiency of the African continent-wide share price indices over their individual national share price indices. Third and in contrast, none of the individual national share prices indices investigated are efficient, especially when the empirically robust non-parametric tests are implemented.

Although the markets were selected according to data availability the JSE is excluded from the sample of African stock markets studied here because of its large size of around 80% of total market capitalisation of African stock markets in aggregate, which put it in a league of its own and will thus be better categorised with the emerging markets of Asia and Latin America. The second largest African stock market in terms of market capitalisation is Egypt, which is about 11% of the total African stock markets capitalisation. Again South Africa has been relatively widely researched in comparison with the other African stock markets. The intention of this study was to bring more focus on those markets but have lingered in the background of the limelight.

Conclusions from this paper are relevant for portfo- lio diversification strategies and policy makers. Firstly, this strong integration specific at larges scales means that African stock markets excepted South Africa do not re- act immediately to world financial shocks. This long run integration could be an opportunity of capital diversifica- tion for financial agents in small time scales. Secondly this large scales integration could be explained by chan- nels of transmission of the financial information flow be- tween the African and external stock markets that are not sufficiently developed (non-efficient financial institu- tions and a low representation of African or world enter- prises listed in African stock markets. . . ). The authorities concerned should therefore redouble their efforts in view of the substantial economic advantages stemming from devel- oped stock markets(Hicks, 1969; Levine, 1997; Calder´on and Kubota, 2009).

Can emerging African Stock Markets improve their informational efficiency by formally harmonising and integrating their operations?. Ntim, Collins G and Opong, Kwaku K and Danbolt, Jo an[r]

(Chevallier, 2010). Indeed from 2006 to 2007 the global oil supply is stabilized and the demand continues to increase in exceeding in the early 2008. This stimulates specula- tive acts of non-commercial agents based on an oil price increase at the end of the year (Buyuksahin et al., 2008). However the U.S economic recession, direct consequence of the financial crisis, is manifested by a decrease in oil consumption (Redoul`es, 2009) and thus an increase of supply which led to a speculative reversal. This speculative reversal causes a decrease in oil prices that have a direct impact in American financial markets returns being strongly linked to them. On their side, Dupuis and D’Anjou (2008) show that fear and lack of confidence spread into the financial system and by speculators during financial crisis led investors to withdraw their money from the oil market. This reaction generates lower oil prices which dramatically reduces access to credit and leads to a risk of investing in new oil production capacity. Mba (2009) notes that the majority of small and medium oil companies listed are out of cash because they can no longer raise the necessary funds from banks. The major oil companies are forced to invest their own funds which cause a decrease in their financing projects. These poor moves lead to a decline in the oil demand of these companies which caused a drop in crude oil prices.

percent. In 2006 and 2007, the index closed at 1204.5 and 1852.2, representing annual increases of 49.8 percent and 53.8 percent, respectively. Put differently, the market rose 373.6 percent over the 10 year period ending in December 2007. This evolution has taken place in a context of financial reforms including the liberalisation of domestic capital markets which has led to significant foreign portfolio investments, which in turn have supported the growth of the market. For example, in 2007 net foreign investments into Mauritius reached a record level of net inflows of USD52 million (i.e., the highest annual level reached since the market was opened to foreigners in 1994). Similarly, the benchmark index in Botswana (i.e., the DCI) rose from 2498.7 in 2003 to 8421.6 at the end of 2007, an increase of 237.0 percent, on the back of large portfolio equity flows (from both domestic and foreign institutional investors). This trend also applies in the case of the largest ASMs. For instance, following the implementation of comprehensive financial reforms in 1996 the all- share index in South Africa rose has risen from 4880.5 at the start of 1996 to 28,957.9, an increase of 493.3 percent at the end of 2007. The equity markets of Egypt and Ghana peaked earlier (compared to the other ASMs) and decelerated sharply, though recent data points to their recovery. For example, in 2007, the Ghana Stock Exchange (GSE) all-share index ended the year at 6,599 points, representing an annual increase of 31.8 percent compared to the yearly improvement of 4.3 percent recorded in 2006.

The em ergence of African st ock m arket s was m ost ly driven by t he desire t o privat ise st at e- owned ent erprises. This em ergence is concent rat ed bet ween t he lat e 1980s and early 1990s, a period t hat wit nessed a num ber of financial liberalisat ion program s in Africa ( Bekaert and Harvey, 2001) . Privat isat ion raised t he prospect s of fully int egrat ing Africa int o t he global econom y ( Mat e, 2000) . Wit h t he shift of int erest from foreign direct invest m ent ( FDI ) t o foreign port folio invest m ent ( FPI ) ( Mat e, 2000) , t he st ock m arket is an im port ant t ool for t he flow of FPI int o Africa. Africa’s low levels of econom ic growt h ( average of 2,2% from 1978 t o 1985, and 2% from 1986 t o 1993) and high debt levels ( 15% of developing world t ot al debt ) have not been associat ed wit h t hriving equit y m arket s ( Erb, Harvey and Viskant a, 1996) .

decays on a monthly basis. This rate, 1.178328 is very high and is symptomatic of response function to shock dying very slowly. Thus, if there is a new shock, it will have impact on return for a long period. In this type of market, old information is more important than recent information and makes the market highly predictable. A predictable stock market is inefficient according to the Efficient Market Hypothesis; as it allows an investor to earn abnormal return without assuming the commensurate level of risk (for more discussion on the efficient market hypothesis, see Fama, 1970, 1991; Inanga and Emenuga, 1997; Olowe,1999). This can affect efficient resource allocation and encourage share price manipulation. This perhaps explains why cases of share price manipulation are rampant in the Nigerian stock market. Again, it signifies that technical analysis can be profitably employed in the Nigerian stock market. This result agrees with Ogum et al (2005) and Frimpong and Oteng-Abayie (2006) who found high response - function (0.92188) for Ghana Stock Exchange (another emerging stock market). In sum, the results of both ARCH (1) and the GARCH (1 1) models show that the market exhibits volatility clustering. Thus, either of these models could account for volatility clustering in Nigerian stock market. However, the study found that on the basis of model selection criteria using Akaike Information criterion (AIC), Schwarz Bayesian Criterion (SBC) and Hannan and Quin Criterion, the GARCH (1 1) is better than the ARCH (1) model. This is because the values in these selection criteria are smaller in the GARCH than in the ARCH model. This result corroborates with Frimpong and Oteng-Abayie (2006), that the GARCH (1 1) model outperformed other models when applied to African stock markets, confirming Brooks and Burke (2003). The result of this study is therefore justified on methodological ground by these prior studies.

Between developed and emerging markets, the study (Abraham et al, 2001; Rao, 2008; Arouri and Nguyen, 2010) stated that GCC countries provide benefit for international diversification due to their low correlation relative to US. US equity markets also cointegrate with market in Pakistan (Rizwan and Khan, 2007; Ali and Afzal, 2012), Bangladesh (Hoque, 2007), Vietnam (Nguyen, 2011) and do not with Czech Republic, Hungary, Poland and Slovakia (Patev et al, 2006; Samitas and Kenourgios, 2007). In the Asian developed and developing context, there are contrast results that there is high degree of stock markets cointegration on one side (Anoruo, 2003; Valadkhani et al, 2008) and no cointegration on the other side (Rajwani and Mukherjee, 2012). Between Asia and Europe it was proved no correlation (Liow et al, 2005). Furthermore, from Thai investors’ perspective, in the short-run their markets are interrelated with UK, US and Singapore (Valadkhani and Chancharat, 2008). Conversely, African stock markets are not cointegrated with global markets, except for South African’s (Agyei-Ampomah, 2011).

Gencay (2012) also believe that volatility clustering is at times caused by multiple trading frequencies and the availability of thin trading (which lead to serial correlation in returns), which may be the case in most emerging and frontier markets, specifically in Africa and some parts of Asia. For the purpose of this study, it is important to note that, the stock market and the exchange rate markets in every country are two important variables which come together to serve a purpose by contributing to financial development, and makes diversification ideas a reality, thus, investors are affected by the dynamics and behaviors of these two markets in every country. Therefore, having adequate knowledge of how these two financial variables which aid in foreign and local investments to a larger extent help in reducing losses, thereby making proper hedges against the risks and movements that exist between them and make the required returns from such portfolio investments (Morales, 2008). Many African stock markets are noted to be illiquid and also characterized by thin trading while on the other hand; exchange rates have over the years performed poorly against the major currencies. For example, the Ghana cedi becoming the worst performing currency in the world during the year 2014 by falling 40% against the United States Dollar alone (Financial Times, Bloomberg, 2014). It is therefore important to note that, as foreign investors go into emerging African markets, there is the tendency to brace up with risks associated with equity and currencies in terms of volatility. By knowing this, foreign investors, multinational corporations etc. would be able to hedge against fluctuations in both markets.

and claims on capital. In this respect, stock exchanges could be defined as the central point of the capital market. The evolution of capital markets in Africa in recent years has been rather dramatic, as countries have sought not only to mobilize domestic resources but also to attract foreign direct investment. Accordingly, activity in a number of capital markets that had been dormant for years picked-up significantly and a number of new markets have emerged. In a number of established stock exchanges, activity has been boosted by increased listings of companies; mostly made possible by privatization of state-owned enterprises. At present, there are about twenty six stock exchanges in the continent see annex]. However, many African stock markets are characterized by a relatively limited number of scrip, which are held to a substantial extent in perpetuity by few insurance and pension funds. The participation by individual savers/investors is significantly limited in a number of markets. The result is that African stock markets (with the exception of Johannesburg) are illiquid. Widening stock market access beyond national boundaries to other stock markets in the region should enhance stock market liquidity and provide savers/investors with significantly more diversified risk opportunities. To this end, the establishment of the West African Regional Stock Exchange in Abidjan in 1998, whose scrip will encompass issues in the eight countries of the West African Monetary Union is already a very encouraging step forward.

The internet has made online trading, and thus the speedy making of transactions at reduced costs, possible. However, on many African stock markets, except for a few such as South Africa, Tunisia and Egypt, it is still not possible to place orders with stockbrokers online unlike in the United States where the number of on-line investors is said to have increased from 2.2 million in 1998 to about 5.2 million in 2000 (Unsal and Movassaghi, 2001). According to Unsal and Movassaghi (2001), in the US, stockbrokerage firms adopted the Internet technology more extensively than many other sectors in the financial services industry with the number of e-brokerage firms growing from only 12 in 1994 to 120 in 1999. They also noted that according to estimates one in every three equity trades made by retail investors in the US are now placed online and it is expected that over the next 3 to 5 years, nearly all investors will use the Internet to access their accounts.

Evaluating the relationship of the two stock markets, in this paper, the evidence results show that the proposed model is appropriate for Taiwan and Japanese stock markets. The evidence result also indicates that the two study market is a positive relation. The average estimation value of correlation coefficient equals to 0.408, which implies that the two study markets, is synchronized influence. On the other hand, the study result also shows that the two stock markets do not have asymmetrical effect. The study result also indicates that U.K. and U.S. stock return rate volatilities affects the return rate volatilities of Taiwanese stock market, and U.K. and U.S. stock return rate volatilities also affects the return rate volatilities of Japanese stock market. Besides, U.S. stock return volatility rates also truly affects the variation risks of two study markets.

This paper examines long and short-run relationships among three emerging Balkan stock markets (Romania, Bulgaria and Croatia), two developed European stock markets (Germany and Greece) and United States (U.S.), during the period 2000 - 2005. We apply Johansen's (1988) cointegration methodology to test the long-run relationships between these markets and Granger's (1969) causality methodology in order to capture short-run cointegration. Our findings are mixed. We provide evidence on long-run relationships between the Bulgarian and Croatian stock markets and the developed markets. On the other hand, there is no any cointegration among the developed markets and the Romanian market. Moreover, there is no cointegrating relationship among the three regional emerging markets, while short-run relationships exist only among the region. These results have crucial implications for investors regarding the benefits of international portfolio diversification.

Increase in the financial integration of global stock markets persuades investors to consider international investments opportunities in order to diversify the risk. However, if these markets have a common trend that leads to a long-term equilibrium, then the benefits of diversification would not be realized. This paper examines the presence of long-term relationship between stock markets of India and several developed as well as developing economies. We use pair- wise cointegration test between Indian stock market and twelve benchmark indices of global equity markets. Contrary to our expectation of a long-term equilibrium relationship between these global stock indices with Indian equity index, we find no evidence of cointegration.