Conditional pricing of currency risk in Africa's equity markets

Abstract

In this paper, we sought to establish whether Africa's volatile currencies drive equity risk premia. We use the SDF framework to estimate various conditional specifications of the International Capital Asset Pricing Model through generalized method of moments technique. Our results show strong evidence of conditional, time-varying currency risk premia in equity returns. Currency risk is also perceived by international investors as important in informing the equities pricing kernel. Interestingly, we find evidence that international investors are concerned about Africa's small size equity markets and build the impact of anticipated low trading into their pricing calculus.