Financial market integration: implications for asset pricing and diversification gains on the emerging African stock markets (ASMs)

The three papers in this thesis investigate the degree of financial market integration, regionally integrated asset pricing, and the response of equity returns to domestic and global industry factors in a pooled sample of 11 African stock markets (ASMs). The impact of the global financial crisis (GFC) on these issues is also explored. Paper 1 explores regionally integrated asset pricing on the ASMs. By pooling securities across 11 ASMs, we show, using the Fama and French model, that asset pricing on the ASMs is not regionally integrated and that the ASMs show a lower level of integration with each other. Also, the model‘s mispricings are high for the absolute measures of size and book-to-market (BM) based models than for their relative counterparts. The evidence is unsupportive of regionally integrated African markets. Paper 2 focuses on whether the world, emerging, and African market factors are priced on the African capital markets. We rely on a multifactor asset pricing model with pre-specified risk factors to investigate the level of African market segmentation with the world and emerging markets. The finding supports the hypothesis of partially integrated African markets with the world and emerging markets. The evidence suggests a time-varying African market integration that appears to have increased in recent times. Paper 3 investigates the relevance of country and global industry factors in describing African equity returns. We show within a variance decomposition framework that industry effects are dominated by country influences on the ASMs, though the relevance of industry factors has increased in recent times. Also, we observe structural breaks around the GFC. The real sector appears to be the channel through which the GFC impacted on the global influence in African equity returns.