Global Integration of African Stock Markets

Abstract

Financial market integration has significant implications for risk sharing and diversification, cost of capital, market efficiency, financial decisions and macro-economic policy. This paper investigates the integration of 11 African markets relative to the world and emerging markets over the period, March 1997 to January, 2013. The investigation is conducted using a multifactor asset pricing model. The paper explores whether a world or emerging market factor commands a premium over a pure African factor. It relies on the returns to a world, emerging and African market indices as risk factors. The factors used in this study are orthogonal to each other. The factors and their associated risk premia are concurrently estimated. Evidence is provided that the world, emerging and African market factors command significant risk premium on the African markets. The findings support partially integrated African market. The evidence shows that both world and emerging market factors are pertinent on the African markets. The evidence is generally sensitive to the period of investigation suggesting changing integration through time.