Stock (MIS) Pricing and Diversification in Africa: Evidence from Selected African Exchanges
This paper ascertains the extent of mispricing in equity portfolios, mispricing-under-investment relation and the
role of African equities as risk diversification strategies during commodity markets turbulence. Following Baur and Lucey
(2010), one identifies arbitrary commodity market crisis to be 1%, 5% and 10% declining moments in returns. However, their
approach is extended by using African equities as a safe haven against gold. A risk-augmented CAPM is specified to estimate
the mispricing in equity portfolios while the risk diversification model follows Baur and Lucey (2010). For all the estimations,
the regressions are run on daily data from 5th January, 2010 to 30th December, 2015. First, the results show the presence of
transient mispricing in the portfolios returns of African equities regardless of the firms’ liquidity and volatility levels. More
so, stronger mispricing is observed using an alternative specification. Second, mispricing causes significant divestment in big
size portfolios. The conclusion is that mispricing in a portfolio of equity returns is due to low frequency of trading and that
Africa’s equity markets are risk diversifiers and safe havens for commodities.
Index Terms - Africa’s Equity Markets, Diversification, Mispricing, and Safe haven.