Stock (mis)pricing and Investment Dynamics in Africa

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1 Sock msprcng and nvesmen Dynamcs n Afrca Sad Aanda Musapha n 273 July 2017 Workng aper Seres Afrcan Developmen Bank Group

2 Workng aper N o 273 Absrac The sudy ascerans he exen of msprcng n equy porfolos and msprcng nvesmen relaon usng he pos fnancal crss sock nformaon. A rsk-augmened capal asse prcng model CAM s specfed o esmae he msprcng n equy porfolos whle he msprcng nvesmen relaonshp model follows Mohammed For all he esmaons he regressons are run on daly daa from 5 January 2010 o 30 December Frs he resuls show he presence of ransen msprcng n he porfolos reurns of Afrcan eques regardless of he frms lqudy and volaly levels. More so sronger msprcng s observed usng an alernave specfcaon. Second msprcng causes sgnfcan dvesmen n bg-sze porfolos. Meanwhle s less mporan n small and medum-sze porfolos. furher causes overnvesmen n medum sock porfolos whle effecs of over-valuaon prove o be velvey on porfolos across board. The concluson s ha msprcng n a porfolo of equy reurns s due o low frequency of radng and nong he evl hs could cause on nvesmen n socks he paper recommends he jesonng of nvesors buy and hold radng sraegy and encouragng porfolo nvesors o form sock porfolos wh frequenly raded socks so as o lessen he effec of sock msprcng. Ths paper s he produc of he Vce-resdency for Economc Governance and Knowledge Managemen. s par of a larger effor by he Afrcan Developmen Bank o promoe knowledge and learnng share deas provde open access o s research and make a conrbuon o developmen polcy. The papers feaured n he Workng aper Seres WS are hose consdered o have a bearng on he msson of AfDB s sraegc objecves of nclusve and Green Growh and s Hgh-5 prory areas o ower Afrca Feed Afrca ndusralze Afrca negrae Afrca and mprove Lvng Condons of Afrcans. The auhors may be conaced a Rghs and ermssons All rghs reserved. The ex and daa n hs publcaon may be reproduced as long as he source s ced. Reproducon for commercal purposes s forbdden. The WS dssemnaes he fndngs of work n progress prelmnary research resuls and developmen experence and lessons o encourage he exchange of deas and nnovave hnkng among researchers developmen praconers polcy makers and donors. The fndngs nerpreaons and conclusons expressed n he Bank s WS are enrely hose of he auhors and do no necessarly represen he vew of he Afrcan Developmen Bank Group s Board of Drecors or he counres hey represen. Workng apers are avalable onlne a hps:// roduced by Macroeconomcs olcy Forecasng and Research Deparmen Coordnaor Adeleke O. Salam Correc caon: Musapha S. A Sock Msprcng and nvesmen dynamcs n Afrca Workng aper Seres N 273 Afrcan Developmen Bank Abdjan Côe d vore. 0

3 Sock Msprcng and nvesmen Dynamcs n Afrca 1 Sad Aanda Musapha JEL Codes: F21 G01 G12 G15 Keywords: Msprcng nvesmen Rsk-Augmened CAM and Afrca s Equy Markes 1 Sad Aanda Musapha was a Vsng Research Fellow of he Afrcan Economc Research Consorum AERC and he Afrcan Developmen Bank AfDB and s a member of saff of he Deparmen of Economcs and Sascs Unversy of Benn Benn Cy Edo Sae Ngera. The paper was prepared durng he perod when he was a Vsng Research Fellow a he Afrcan Developmen Bank. He sncerely apprecaes he fundng receved from AfDB and AERC. He s also graeful o rof. John C. Anyanwu Dr. Adeleke Salam and Dr. Jacob Oduor of he AfDB and oher saff of he Macroeconomcs olcy Forecasng and Research Deparmen of AfDB for her consrucve conrbuons. 1

4 1 nroducon Beween 2000 and 2007 Afrca receved enormous prvae capal flows CFs such ha he value of he nflow o Sub-Saharan Afrcan counres ncreased by over 300 percen 2 see MF/World Bank The adven of he 2008 global fnancal crss has resuled n he declne of porfolo nvesmen n Afrca Macas and Massa 2009; World Bank 2009; Osakwe 2010; Dullen e al and consequenly an ample number of Afrcan sock markes dd no only suffer from he conagous effec bu also faced huge dvesmens and capal flow reversal MF The former has been arbued o he over-valuaon of socks whle he laer has been as a resul of ncreased uncerany on expeced reurns AfDB 2009; MF 2009; Beck e al Sudes have esablshed ha an over-valued sock prce s sensve downward o negave sock marke shocks as prce adjuss quckly o s nrnsc or rue value and hus reduces he value of sock nvesmen Ledo and Wolf 2003; Mohammed 2006; Kan and Zhou 2009; Yan and Garca Whn sx monhs Afrcan sock nvesors experenced an average loss of more han half he wealh nvesed a he end of July 2008 AfDB Losses recorded n mos of he Afrcan sock markes are hgher han hose of he Uned Saes Hong Kong and France see Table 1. Alhough he Amercan French and Hong Kong markes were adversely affeced by he crss mos of hese markes have fully recovered see Table 1. The pos-crss sock marke performances showed he sgnfcan effec of over-valuaon of equy porfolos and prces before he fnancal crss n mos of he sampled Afrcan counres: Morocco Egyp and Ngera n parcular see Table 1 and Fgure 1. On hs noe he over-valuaon of nvesors equy porfolos before he crss had heghened he effecs of he fnancal crss on he value of nvesors equy porfolo n Afrca. Shorly afer he fnancal crss here was rsng suscepbly of equy markes o varous forms of economc shocks whch have led o he resurgence of nvesors appee for alernave means o dversfy and for downsde marke rsk. n he las decade nvesors have consdered commodes as hghly lqud fnancal asses Baur and Lucey 2010; Vvan and Wohar A 2008 repor by he US Commodes Fuures Tradng Commsson CFTC showed ha nvesmen nflows o varous commody fuures markes rose o US$200 bllon n 2008 CFTC Ths value furher ncreased by US$10 bllon a he end of n 2000 prvae capal flows o Afrca was US$11bllon and rose o US$53 bllon n See CFTC ndex nvesmen Daa 2

5 Msprcng s one of he promnen facors ha have resuled n he huge dvesmen afer he global fnancal crses of 2008/09 whch had reduced nvesors confdence n equy markes. The connued dvesmen had resuled n perssence declne of performances of he markes and up o he me of wrng markes have no recovered. n an aemp for sock markes o benef from he recen subsanal declnng momens n commody markes n 2014 and see Fgure 2 whch has offered nvesors new mpeus o dversfy her nvesmen porfolos across economes 5 here s need o presen a sudy ha provdes nformaon on suaonal analyss of msprcng and s mpac on dvesmen n Afrca s equy markes. For Afrcan equy markes o denfy and benef from he possble nernaonal cross-border porfolo nvesmen flows and dversfcaon opporunes arsng from he declnng performance n he commody markes requres approprae prcng of equy porfolos. For hese reasons hs paper rases wo man quesons. Frs are Afrcan equy porfolo reurns properly prced and f so wha s he exen of msprcng? Second dd he msprcng cause changes n nvesmen on he exchange? Answers o hese requre sudes on msprcng of equy porfolo reurns whch s vrually non-exsen for mos Afrcan counres and evdence from Afrcan eques for he second queson remans scany n pos fnancal crss daly daa. 4 Followng he sharp declne n 2014 commody prces weakened furher n The prces of ol and meals such as ron ore copper and planum declned subsanally. rces of some agrculural commodes such as cocoa and coffee also fell moderaely. 5 Generally modern porfolo heory encourages he holdng porfolo of socks o dversfy dosyncrac rsks Markowz

6 Table 1: mpac of Fnancal Crss on Seleced Equy Markes Counry ndex name Benchmarks Afrcan Eques EGYT CASE 30 NDEX MOROCCO CASA ALS Marke Value February 2009 Losses due o fnancal crss percen Marke value December 2012 erssen losses/ recoveres percen NGERA NSE ALS SOUTH AFRCA JALSH Seleced Eques USA DJ ndusral HONG HSND CAC40 FRANCE ND Source: Bloomberg Termnal and Counres Equy Exchange Markes Fgure 2: Trends of Commody rces V V V V rce Trend of Ol n USD rce Trend of Gold n USD rce Trend of Cocoa n USD rce Trend of lanum n USD Source: Auhor s compuaon. Noe: Underlyng daa are from Bloomberg Termnal and World Bank daabase hp://daa.worldbank.org/ndcaor/bn.klt.txl.cd?locaons=ma The concep of msprcng of equy porfolos has long been a major ssue n he leraure. Fama and French 1993 for nsance reveal ha ess of classcal asse prcng models such as he capal asse prcng model CAM he consumpon-based capal asse prcng model CCAM and he neremporal capal asse prcng model CAM mplcly rely on an assumpon of marke effcency whch perms he subsuon of realzed reurns 4

7 for expeced reurns. There s ncreasng evdence ha common socks are msprced relave o hese models. 6 The reasons for hese msprcngs vary across equy markes and herefore reman nconclusve n he leraure. Jegadeesh and Tman 1993 and Brennan and Wang 2006 for nsance fnd posve auocorrelaon of ndvdual sock reurns a he 6-12 monh horzon whch s conssen wh he slow adjusmen o frm specfc news documened n a large number of sudes. Jegadeesh and Tman 1995 and Musapha 2015 fnd evdence ha sock prces end o over-reac o frm specfc nformaon such as volaly. Some sudes found ha sock reurns co-vary wh he sae of sock marke lqudy for example ásor and Sambaugh 2003 Acharya and edersen 2005 and Sadka 2006 whle sudes ha show ha unancpaed ncrease n marke llqudy and senmen affec he level of equy prces nclude Lee and Swamnahan 2000 Swamnahan 1996 and Amhud Based on hs evdence ha sock msprcng s crucal o successful nvesmen on he exchange as s caused by marke specfc characerscs and hugely deermnes he aracveness of he sock marke o porfolo nvesmen flows herefore he objecve of hs paper s o examne he presence of msprcng n equy porfolos and demonsrae he relaonshp beween msprcng and nvesmen n Afrcan Sock Exchanges. n hs regard hs paper focuses on four Afrcan Exchanges Johannesburg Sock Exchange JSE Ngeran Sock Exchange NSE Egypan Sock Exchange ESE and Casablanca Sock Exchange CSE. The resuls confrm fndngs of earler sudes ha msprcng s nfluenced by sock lqudy and volaly. The msprcng nvesmen relaon shows ha msprcng effecs are promnen on medum- and small-sze porfolos n he Casablanca and Ngeran Sock Exchanges whle he effec appears noceable n bg-sze socks n he Egypan sock marke. The paper s n fve secons. Ths frs s nroducory; he second revews relevan leraure; he hrd provdes he mehodology and daa requremens whle esmaon resuls mplcaons and dscussons are covered n he fourh and he ffh offers conclusons and polcy recommendaons. 2 Bref Revew of Relaed Leraure Ths secon s a bref summary of prevous emprcal sudes on msprcng and rsk dversfcaon. Msprcng of Eques 6 French and Roll 1986 sugges ha on average of 4 o 12 percen of he daly reurn varance of common sock reurns s due o msprcng. 5

8 The leraure on msprcng s vas bu hs sudy wll hghlgh jus a few of hem. De Bond and Thaler 1985 and 1987 fnd a long run reversal of pror sock prce changes. They nerpre he reversal as correcons of over-reacons o news. Jegadeesh and Tman 1993 buress her poson by usng he NYSE and AMEX socks. The same auhors 1995 reveal ha sock prces end o over-reac o frm specfc nformaon such as volaly dsbursemen of dvdends and radng volume. Lee and Swamnahan 2000 show ha low/hgh sock radng volumes end o be under/over-valued by he marke. Meanwhle Amhud 2002 demonsraes ha an unexpeced ncrease n marke llqudy reduces sock prce levels. ásor and Sambaugh 2003 ndcae ha sock reurns are affeced by he sae of sock marke lqudy a clam suppored by Acharya and edersen 2005 and Sadka Msprcng and nvesmen Relaonshp Copous leraure affrms ha sock prces reflec he margnal produc of capal where frms nves unl he marke value of he exsng capal asses equals her replacemen cos Branard and Tobn 1968; Tobn Meanwhle some sudes show ha sock valuaon has lmed power n explanng shocks o nvesmen n socks see von Fursenberg 1977; Clark 1979; Summers Recen sudes concluded ha he sock marke has a sgnfcan effec on nvesmen decson beyond ha of he fundamenal varables such as cash flows Barro 1990; Chrnko and Schaller 2001 and Mohammed Essenally numerous researches have been conduced on msprcng and msprcng nvesmen relaon. Sudes on msprcng have esablshed ha news marke lqudy and frm specfc nformaon such as volaly causes msprcng n sock prces and porfolo of equy reurns. These sudes concenrae on developed markes such ha researches on developng markes reman ndescrbable. Furhermore sudes examnng he causal effec beween sock msprcng and changes n nvesmen are severely lmed for Afrcan sock markes afer he pos fnancal crss. Ths paper addresses hese wo ssues usng seleced Afrcan equy markes. 3 Mehodology and Daa 3.1 Daa The daa used for he frs and second quesons conss of daly average reurns of seleced eques of four Afrcan equy exchanges Souh Afrca Ngera Egyp and Morocco. The choce of hese exchanges s premsed on he fac ha hey hghly araced nvesors n he 6

9 pas: hese exchanges receved large proporon of porfolo nvesmen nflows durng marke calmness and experenced huge dvesmens when he marke crashed. n addon he exchanges are more developed n comparson o ohers see ASEA n each of he four Afrcan equy exchanges 60 frms were seleced makng a oal of 240 socks. The choce n he selecon of socks s based on prce connuy. The daa were colleced on a daly bass and sock reurns generaed from he prces usng equaon 3. orfolos are sored no bgsze/hgh-volume medum-sze/medum-volume. and small-sze/low-volume based on frm s capalzaon and volaly. The analyses were done separaely for each marke and sock reurns were averaged on a daly bass. Daa on sock prces volume and capalzaon and marke capalzaon were used and garnered from he webses of hese sock exchanges excep ha Egyp sock daa are from he Reuers ermnal durng he perod 5 January 2010 o 30 December The daa are close o daly frequency. R p lnp *100 3 ln 1 where R and 1 are reurns and prces/ndces a me and one perod lag respecvely. 3.2 Mehodology There are exan models of msprcng n he leraure. They nclude models assumng ha msprcng s ndependen of fundamenals and follows a smple frs-order auoregressve model see oerba and Summers Models ha assume ha msprcng s due o slow adjusmen of marke prces o new nformaon Dmson 1979; Brennan e al. 1993; Brennan and Wang 2006 and models demonsrang ha msprcng s assocaed wh a marke-wde msprcng facor Fama and French 1993; Brennan and Wang The models ha assume msprcng s assocaed wh a marke-wde msprcng facor s also called he model of sysemac msprcng. One major focus of hs paper s o asceran he presence of msprcng n porfolos of eques n Afrcan markes. Therefore wll be que approprae o consder marke facors drvng msprcng and generang a marke-wde msprcng facor. Essenally hs paper adops a sysemac msprcng approach o examne he exsence of msprcng n porfolos of eques n seleced Afrcan markes: JSE NSE ESE and CSE. Emprcal evdence shows ha mos promnen marke facors drvng msprcng n socks are lqudy and volaly Lee e al. 2000; and Acharya e al Accordng o Archarya e al hese facors have caused msprcng relave o a gven raonal prcng model. Agan sudes have revealed ha socks are msprced relave o he classcal asse 7

10 prcng models. 7 Ths evdence enables he sudy o specfy a rsk-augmened CAM o valdae he presence of msprcng n he porfolo of seleced Afrcan eques. The facors consdered for he augmenaon are average frms lqudy and volaly. The prncpal regresson model s herefore specfed n equaon 1 as follows: R R vol j j0 1 j mk 2 j 3 j j where R lq R lq and vol are excess porfolo reurns marke reurns lqudy measure mk proxy wh daly average change n volume of frm s ransacons and average frms sysemac volaly. ' s and are nerceps sensves and error erms. Sgns j and represen seleced sock markes porfolos and me dmensons. Equaon 1 s esmaed hrough he mulvarae leas square echnque. For easer esmaon socks are sored no hree dfferen porfolos based on her szes average frm s capalzaon and frm s volaly sandard devaon of daly sock prces. The marke msprcng facor s he varance rao of he rsk-augmened CAM resdual whch s measured by VR m var e m m 1 var e ; hs s lne wh Andersen e al Brennan and Wang 2006 L and Lu 2012 and Hong e al Where m e 1 s he cumulave resdual reurn over m- days. n he presence of shor-lved msprcng he resdual of rsk-augmened CAM wll be VR m less han uny so ha 1. f he msprcng facor s very low hen he sronger s he mean reverson n msprcng; more so when he msprcng facor s uny here s absence of msprcng see Brennan e al. 1993; and Brennan and Wang The choce of modellng esmaons and nerpreaon of he varance rao of he rsk-augmened CAM resdual are n lne wh Brennan and Wang To analyze he second queson he sudy follows he works of Farh and anageas 2004 and Mohammed revous sudes have examned he relaon beween msprcng and nvesmen wh neres n under-valued frms Baker e al whle he sudes of anageas e al and Glchrs e al consdered over-valuaon.. Sudes by olk and Sapenza 2009 Fahr and anageas 2004 and Mohammed 2006 consder boh over- and under-valued frms. However olk and Sapenza s 2009 model dd no separae he ype of msprcng and nvesmen o verfy he relaonshp beween msprcng and forms 7 Emprcal sudes have revealed ha socks are msprced relave o he classcal asse prcng models such as CAM CCAM and CAM see French and Roll 1986; Jegadeesh and Tman 1993 and 1995; Lee and Swamnahan 2000; Acharya and edersen n vew of such evdence usng he CAM whou augmenaon may resul n esmaon bas. 8

11 9 of nvesmen under- and over-nvesmens. The model adoped n hs sudy s n lne wh Mohammed 2006 bu modfed by classfyng socks no dfferen porfolos and ncludng he effec of pas msprcng. The model esmaed s specfed n equaon 2c. Where he varables on he rgh and are defned as oal change n nvesmen n sock porfolo sze over-nvesmen n sock porfolo sze and undernvesmen n sock porfolo sze. The varables on he lef conss of sock msprcng varable ms and lags. The sudy also conrolled for over-valuaon n sock porfolos as earler sudes had demonsraed ha he relavely hgh mpac of fnancal crss fel by sock markes n Afrca s due o over-valuaon AfDB 2009; MF 2009; Beck e al The conrol was done by nroducng dummy varable V. n assgnng he dummes he paper allocaed one 1 for perods wh over-valuaon posve value of msprcng n he msprcng seres and zero 0 oherwse. and are porfolo classes Bg Medum and Small and me perods respecvely. Models specfed are esmaed hrough he leas square esmaon echnque. The nvesmen n lsed sock s proxed by daly value of socks raded. The sock msprcng seres reman he resdual of he rsk adjused CAM model. ˆ j j R R resdual hs s n lne wh Brennan and Wang 2006; Mohammed 2006; and Wang e al Esmaon Resuls mplcaons and Dscusson 4.1 Descrpve Sascs The summary sascs n Annexure 1 descrbes he behavour of seres used n he analyss. Apar from he descrpve sascs he able also conans he saonary es resuls. The Augmened Dckey-Fuller ADF es was employed as a saonary es. The resuls n he able show ha even a 99 percen confdence level he Jarque-Bera es sascs for mos of he varables are sgnfcan and herefore ndcae ha here s no evdence ha he null hypohess of normal dsrbuon should be acceped. The saonary es also rejecs he null hypohess of non-saonary for all he varables used n he esmaons a order zero 0. Ths ndcaes ha he orgnal seres are saonary a he frs order of dfferencng. Furhermore he descrpve sascs show ha all he varables have kuross whch s greaer han normal. Ths suggess ha he varables exhb lepokurc behavour. The skewness c V c c c c c c b V b b b b b b a V a a a a a a c ms ms ms ms b ms ms ms ms a ms ms ms ms

12 values are negave for almos all he varables excep for marke lqudy. The negave skewed sascs of he seleced Afrcan equy exchanges repor ha he probably of nvesors seeng posve reurns from posvely skewed asses are hgher han hose ha are negavely skewed. 4.2 Msprcng of Reurns n Afrcan Equy orfolos Tables 2a and 2b show he resuls of he reurn msprcng n equy porfolos. Table 2a shows he esmaed resuls of porfolos sored by lqudy whle Table 2b presens esmaes of porfolos havng been conrolled for volaly. n Table 2a he magnude of he varance rao declned monooncally from large o small number of days whle he volaly of resdual reurns ncreased accordngly. Ths relaonshp was expeced and suggess ha he volaly of resdual reurns s drven by he frequency of equy radng. For equy porfolos raded whn a few days he volaly of resdual reurns decreased whch mples ha he msprcng rsk assocaed wh equy reurns of porfolos regardless of porfolo sze declnes as socks are frequenly raded. Ths behavour was found n all he counres excep n some rval cases such as bg and medum-sze porfolos n Egyp ha move conrary o hs relaonshp. The resul s n lne wh he fndngs of Gemmll and Thomas 2002 and Brennan and Wang 2006 whch repored ha msprcng reurn bas decreases ncreases n he varance rao and o ncrease decrease n resdual reurn volaly. Gemmll and Thomas 2002 used closed end funds as he underlyng asse whle he socks regsered on he New York Sock Exchange AMEX and NASDAQ were used n he work of Brennan e al The msprcng analyss s based on he varance rao usng varous numbers of days and 20 days. The resuls n anel A of Table 2a conan esmaes of wo counres Egyp and Morocco. Wh he rsk-augmened CAM he msprcng n he bg-sze porfolo declnes drascally as he frequency of radng days rse n Egyp socks. n fac he msprcng aenuaed when he porfolos are raded every 5 days and repored as n he cell. A smlar rend was observed for he small-sze porfolo whereas he medum-sze porfolo shows a dfferen paern wh ncreased msprcng. Ths mples ha nvesors akng posons n he Egypan sock marke should order porfolos wh more of bg- and small-sze socks o overcome he mpac of msprcng on equy porfolo reurns. n he Casablanca sock marke he bg and medum-sze porfolos yelded beer resuls compared o a small-sze porfolo. Holders of bg-sze porfolos should no boher abou msprcng n her porfolos as long as hey rade hs porfolo on a regular bass of a leas 5 days nerval on he average. Resuls for Ngera and Souh Afrca are documened n anel B. n Ngera holders of medum- and small- 10

13 sze porfolos ha are frequenly raded should no be scared of msprcng effecs. The resuls of hese wo porfolos show ha porfolo msprcng s ransen on hgh-frequency radng and converge quckly o he mean as s close o uny he coeffcens for medum- and smallsze porfolos are and respecvely. The bg-sze porfolo has low coeffcens of he varance rao compared o oher porfolos and needs o be raded more frequenly especally on daly bass as converges lae o uny. For Ngera hese resuls come as no surprse because of poor rang sysem and he usual hab of buy and hold sraegy of speculave nvesors. The suaon dffers n he Souh Afrcan marke because he resuls of he bg-sze porfolo ndcae absence of msprcng. Here msprcng n he porfolo dsappears very quckly even for speculave nvesors adopng a buy and hold sraegy. Alhough for hs porfolo here s msprcng f radng delays for hree weeks however hs msprcng s shor-lved and he effec s rval on expeced porfolo reurns. nvesors akng posons n medum-sze socks may have her porfolo reurns unaffeced by msprcng see Table 2a. The medum-sze porfolos show ransen msprcng n all perods. There s an absence of msprcng f he porfolo s raded a less han 5-day nervals. For small-sze porfolos he msprcng resul s no dfferen from he medum-sze ones. These fndngs sugges ha s possble for he msprcng n porfolo o become neglgble as long as he porfolo s raded on a daly bass. The msprcng behavour n Souh Afrca shows ha he Johannesburg Sock Exchange s lkely o be more effcen o prce dscovery compared o oher sock markes consdered n he sudy. Table 2b conans he esmaes of msprcng when porfolo reurns are sored hrough sysemac volaly for he four exchanges. Havng conrolled for marke specfc volaly he varance raos for ndvdual socks are sll very nosy owng o ncreased volales n mos cases and hence porfolo average varance rao esmaes are very wde rangng from o for he Egypan Sock Exchange; from o for he Casablanca Sock Exchange; from o for he Ngeran Sock Exchange; and from o for he Souh Afrcan Sock Exchange. From he resuls he Souh Afrcan esmaes change sgnfcanly n comparson o when porfolos are sored on he bass of lqudy. There s clear ransen msprcng n all he hree porfolos bu he msprcngs are shor-lved as long as porfolos are frequenly raded advsedly whn 24 hours. The robusness of resuls n Annexure 2 were esmaed hrough alernave specfcaon he Black CAM. Ths s a verson of CAM ha gnores he mpac of he rskless asses. s apparen from he resuls ha msprcng n socks s sronger for all porfolos excep for Souh Afrca s bg-sze porfolo. The resuls corroborae wh French and 11

14 Roll 1986 who found msprcng effecs on he daly reurn varance of common sock o hover around 4 o 12 percen on average. The esmaes of he volaly of resdual reurns show ha ndvdual socks on he JSE are very nosy comparable o oher selec exchanges. Ths s evden wh hgh levels of volaly n boh lqudy- and volaly-sored porfolos. Neverheless s srkng ha for 20 ou 24 porfolos he resuls of VR 5 show ha msprcngs are shor-lved. Ths suggess ha for consanly raded porfolos he effec of msprcng s no pronounced usng he pos- 2008/09 crss daa. s apparen ha hs may conradc he percepon of mos nvesors ha have aken posons n Afrcan eques pror o he 2008/09 crss. However hese resuls reman rue only f nvesors can dess from her buy and hold radng sraegy. The fndngs show ha lqudy and volaly nfluence msprcng of porfolo reurns n Afrcan eques whch s conssen wh he fndngs of Lee and Swamnahan 2000 ásor and Sambaugh 2003 Acharya and edersen 2005 Sadka 2006 and Brennan and Wang 2006 showng ha equy reurns are affeced by he sae of radng volume volaly and marke lqudy usng developed equy markes. 4.3 resenaon and Analyss of he Msprcng Dvesmen relaon Table 3 summarzes he dvesmen response o msprcng and over-valuaon of porfolos. The oal and over-nvesmen models are also esmaed. The resuls are avalable n Annexures 3 and 4 bu no presened n he paper. The neres of he sudy s he dvesmen relaon as he over-nvesmen heralds posve mpac on sock markes performance and porfolo nvesmen flows. Counry-specfc resuls are presened n he panels. n anel A he dvesmen n bg socks s sgnfcanly deermned by msprcng and over-valuaon. Whle he msprcng s negave over-valuaon shows posve relaon n he model. Ths mples ha n Egyp he ransen msprcng dd no nduce dvesmen n bg sock porfolo. The posve over-valuaon dvesmen relaon suggess ha as over-valuaon declnes n sock porfolo reurns nvesmen ncreases as dvesmen falls. The resuls of he medum and small porfolos show over-valuaon effecs on dvesmen whch ndcaes ha nvesors wll sgnfcanly dves medum and small porfolos as msprcng ncreases. n hs case he ransen msprcng causes dvesmen n medum and small sock porfolos. The overvaluaon dd no maer for medum and small porfolos as he coeffcens are no sgnfcan. anel B shows he resuls of he Casablanca Sock Exchange. n bg socks s apparen ha he ransen msprcng and over-valuaon dscourage nvesmen on he Exchange. These are refleced n he sgnfcan posve coeffcens. ndcaes he exen ha 12

15 msprcng and over-valuaon ncrease dvesmen n sock on he sock marke. n boh medum and small porfolos over-valuaon ncreases dvesmen n he marke. Meanwhle msprcng shows a negave coeffcen whch mples ha he ransen msprcng canno cause dvesmen n medum and small socks. These resuls can be because he sample conans many under-valued socks whch n effec ouwegh he effec of over-valuaon. n crss under-valued socks apprecae and hus ncrease reurns. Holders of such socks prefer o go long on and even wsh o ncrease her sake whch n urn drves sock prces hgher unl he marke equlbrum s aaned. Therefore s expeced ha he msprcng effec could ncrease nvesmen raher ha reducng. n he Ngeran Sock Exchange sock msprcng and over-valuaon sgnfcanly ncrease dvesmen n bg socks. Ths manfess from he sgnfcan posve coeffcens presened n anel C. The ransen msprcng and over-valuaon are less mporan o deermnng dvesmen n medum sock porfolos as he coeffcens are no sgnfcan. n small socks over-valuaon causes dvesmen bu he msprcng effec s no clear. These resuls ndcae ha nvesors should be long on medum- and small-sze socks n order o ncrease radng reurns on he Exchange. s also crcal o frequenly rade he bg-sze porfolo socks o reducng msprcng and over-valuaon effecs. anel D conans he Souh Afrcan resuls. The resuls show ha rrespecve of he porfolo sze he ransen msprcng does no cause dvesmens bu over-valuaon sgnfcanly does. The posve relaonshps beween over-valuaon and dvesmen for all porfolo szes show ha as socks are overvalued durng crses nvesors end o drop he socks for under-valued socks nernal dvesmen. Essenally he mpac of msprcng on dvesmen under-nvesmen shows mxed resuls. Dvesmen n bg socks can be caused by he ransen msprcng parcularly ndcaed for Morocco and Ngera. Meanwhle dvesmens n medum and small sock porfolos are caused by msprcng n Egyp. Ths effec does no hold for socks on he Moroccan Ngeran and Souh Afrcan Sock Exchanges. Therefore he msprcng dvesmen relaon s more promnen n bg-sze porfolos. 13

16 Table 2a: Msprcng of orfolos of Eques usng he Varance Rao anel A: Resuls of Msprcng of Equy orfolos sored by Sze Egyp and Morocco Raos EGYT MOROCCO Bg-Sze orf. Med.-Sze orf. Small-Sze orf. Bg-Sze orf. Med.-Sze orf. Small-Sze orf. coef. volaly coef. volaly coef. volaly coef. volaly coef. volaly coef. volaly VR VR VR VR Adj R-SQRD 17.20% 10.10% 9.80% 13.40% 10.70% 5.20% anel B: Resuls of Msprcng of Equy orfolos sored by Sze Ngera and Souh Afrca Raos NGERA SOUTH AFRCA Bg-Sze orf. Med.-Sze orf. Small-Sze orf. Bg-Sze orf. Med.-Sze orf. Small-Sze orf. coef. volaly coef. volaly coef. volaly coef. volaly coef. volaly coef. volaly VR VR VR VR Adj R-SQRD 8.92% 7.04% 9.40% 6.55% 8.80% 10.09% Source: Auhor s compuaon; underlyng daa are derved from wo man sources: offcal webses of Exchanges and Auhor s calculaons. Volaly s he volaly of resdual reurns whch s compued by akng he sandard devaon of he porfolo resduals a dfferen perodc nervals of and 20 days. The varance rao s also compued along hese nervals. The adjused R-squared shows ha for each of he models he explanaory varables are que sgnfcan even afer conrollng for degrees of freedom. The esmaes are oucomes of several regressons and auhors calculaons. The model used for he regressons s he rsk-augmened CAM he rsks consdered are lqudy and volaly makng he CAM a hree-facor model. The bg medum and small-sze porfolos conss of equal socks 20 makng sxy 60 lsed eques n each Exchange. The selecon of hese eques s based on prce connuy. Values n bold ype ndcae quck adjusmen o zero msprcng. 14

17 Table 2b: Msprcng of orfolos of Eques usng he Varance Rao anel A: Resuls of Msprcng of Equy orfolos hrough Sysemac Volaly Egyp and Morocco Raos EGYT MOROCCO Hgh-Vol. orf. Med.-Vol. orf. Low-Vol. orf. Hgh-Vol. orf. Med.-Vol. orf. Low-Vol. orf. coef. volaly coef. volaly coef. volaly coef. volaly coef. volaly coef. volaly VR VR VR VR Adj R-SQRD 10.73% 11.02% 8.49% 10.15% 9.96% 6.33% anel B: Resuls of Msprcng of Equy orfolos hrough Sysemac Volaly Ngera and Souh Afrca Raos NGERA SOUTH AFRCA Hgh-Vol. orf. Med.-Vol. orf. Low-Vol. orf. Hgh-Vol. orf. Med.-Vol. orf. Low-Vol. orf. coef. volaly coef. volaly coef. volaly coef. volaly coef. volaly coef. volaly VR VR VR VR Adj R-SQRD 9.05% 7.61% 8.54% 8.48% 9.13% 10.90% Source: Auhor s compuaon; underlyng daa are derved from wo man sources: offcal webses of Exchanges and Auhor s calculaons. The able conans he esmaes where porfolos are sored by volaly of ndvdual socks. 15

18 Table 3: mpac of Msprcng on Under-nvesmen n Seleced Afrcan Exchanges anel A: Egyp Classes of Sock orfolos Dependen Varable Bg Medum Small 1 Ms V Coeffcens ** * * * sascs R-Squared Adjused R-Squared No. of Observaons anel B: Morocco Coeffcens * * * * *** * -sascs R-Squared Ms V Ms V Adjused R-Squared No. of Observaons anel C: Ngera Coeffcens * ** * * -sascs R-Squared Adjused R-Squared No. of Observaons anel D: Souh Afrca Coeffcens * * *** ** ** ** -sascs R-Squared Adjused R-Squared No. of Observaons Source: Auhor s Compuaon The dependen varable s under-nvesmen whch s he negave dfference beween he average 1 volume of ransacons a me and -1 dvded by he oal volume of ransacon a me -1. The explanaory facors nclude aggregae msprcng and over-valuaon. The over-valuaon was consdered n he model because prevous sudes have recognzed ha over-valuaon ncreases he effec of he fnancal crses on he performances of Afrcan Sock Exchanges. The underlyng daa conan Afrcan eques fallng beween 4 January 2010 and 30 December The -sascs are repored for sgnfcance of varables and coeffcens wh asersks one wo and hree because hey are sascally sgnfcan a 1 5 and 10 percen respecvely. 5 Concluson: Hghlghs and olcy Recommendaons The sudy confrms he presence and exen of msprcng n porfolos of eques and he msprcng dvesmen relaon. The emprcal fndngs below show some nsrucve and neresng hghlghs. 16

19 1. Msprcng of porfolo reurns n Afrca s eques are caused by low radng frequency of socks. Ths s due o he buy and hold sraegy used by speculave nvesors and ncreased gnorance o rade n eques among ndvdual nvesors who consue a large proporon of he oal nvesors n eques. 2. n frequenly raded sock porfolos was seen ha msprcng s shor-lved. Therefore has been concluded ha msprcng n Afrca s equy porfolos regardless of he sze and volaly effecs reman a low radng frequency phenomenon. 3. The ransen msprcng observed n sock porfolos can cause dvesmen n sock porfolos especally he bg-sze porfolos. 5.1 Recommendaons n lne wh he fndngs he sudy recommends he followng. 1. Speculave nvesors should dess from he buy and hold sraegy as s que unhealhy o porfolo reurns of eques. 2. orfolo raders ha nend o lessen he msprcng n a porfolo of equy reurns should form he porfolo wh eques ha are frequenly raded. References Acharya V. V. and L. H. edersen Asse rcng wh Lqudy Rsk Journal of Fnancal Economcs Vol. 77 pp AfDB Afrcan Developmen Bank mpac of he Global Fnancal and Economc Crss on Afrca February Tuns: Afrcan Developmen Bank. Amhud Y llqudy and Sock Reurns: Cross-secon and Tme seres Effecs Journal of Fnancal Markes Vol. 5 pp Andersen T. G. T. Bollerslev and A. Das Varance-Rao Sascs and Hgh Frequency Daa: Tesng for Changes n nraday Volaly aerns The Journal of Fnance Vol. 56 No. 1 pp ASEA Afrcan Secures Exchanges Assocaon Annual Repor Narob: ASEA. Baker M. J. Sen and J. Wurgler When does he marke maer? Sock prces and he nvesmen of equy dependen frms Quarerly Journal of Economcs Vol. 118 No. 3 pp Barro R The Sock Marke and nvesmen Revew of Fnancal Sudes Vol

20 Baur D. and B. Lucey s Gold a Hedge or a Safe Haven? The Fnancal Revew Vol. 45 No. 2 pp Beck T. S. M. Mambo. Faye and T. Trk Fnancng Afrca: Through he Crss and Beyond Washngon DC: World Bank. Branard W. and J. Tobn falls n Fnancal Model Buldng Amercan Economc Revew Vol. 58 pp Brennan M. J. and A. Wang Asse rcng and Msprcng Workng aper Seres Los Angeles: Unversy of Calforna. Brennan M. J. N. Jegadeesh and B. Swamnahan nvesmen Analyss and he Adjusmen of Sock rces o Common nformaon Revew of Fnancal Sudes Vol. 6 pp CFTC US Commodes Fuures Tradng Commsson Saff Repor on Commody Swap Dealers and ndex Traders wh Commsson Recommendaons CFTC ress Release # Sepember. Chrnko R. and H. Schaller Busness Fxed nvesmen and Bubbles : The Japanese case Amercan Economc Revew Vol. 91 No. 3 pp Clark nvesmen n he 1970s: Theory erformance and redcon Brookngs apers on Economc Acvy No. 1 pp De Bond W. and R. Thaler Does he Sock Marke Overreac? The Journal of Fnance Vol. 40 pp De Bond W. and R. Thaler Furher Evdence of nvesor Overreacon and Sock Marke Seasonaly The Journal of Fnance Vol. 42 pp Dmson E Rsk Measuremen when Shares are Subjec o nfrequen Tradng Journal of Fnancal Economcs Vol. 7 pp Dullen S. Koe D. J. A. Márquez and J. rewe eds The Fnancal and Economc Crss of and Developng Counres New York and Geneva: Uned Naons Conference on Trade and Developmen. Fama E. F. and K. R. French Common Rsk Facors n he Reurns on Bonds and Socks Journal of Fnancal Economcs Vol. 33 pp Farh E. and S. anageas The Real Effecs of Sock Marke Msprcng a he Aggregae: Theory and Emprcal Evdence Workng aper hladelpha: Wharon School of he Unversy of ennsylvana. French K. R. and R. Roll Sock Reurns Varances: The Arrval of nformaon and he Reacon of Traders Journal of Fnancal Economcs Vol. 17 pp Gemmll G. and J. C. Thomas Nose Tradng Cosly Arbrage and Asse rces: Evdence from Closed-end Funds. The Journal of Fnance Vol. 57 No. 6 pp

21 Glchrs S. C. Hmmelberg and G. Huberman Do Sock rce Bubbles nfluence Corporae nvesmen? Workng aper Federal Reserve Bank of New York. Hong S. Y. O. Lnon and H. J. Zhang An nvesgaon no Mulvarae Varance Rao Sascs and her Applcaon o Sock Marke redcably Workng apers n Economcs #1459 Unversy of Cambrdge UK. MF/World Bank Regonal Economc Oulook: Sub-Saharan Afrca. n World Economc and Fnancal Surveys Washngon DC: nernaonal Moneary Fund. MF mpac of he Global Fnancal Crss on Sub-Saharan Afrca ublshed by he Afrcan Deparmen Washngon DC: MF Mulmeda Servces Dvson. Jegadeesh N. and S. Tman Reurns o Buyng Wnners and Sellng Losers: mplcaons for Sock Marke Effcency The Journal of Fnance Vol. 48 pp Jegadeesh N. and S. Tman Overreacon Delayed Reacon and Conraran rofs Revew of Fnancal Sudes Vol. 8 pp Kan R. and G. Zhou Opmal orfolo Choce Wh arameer Uncerany Journal of Fnancal and Quanave Analyss Vol. 42 No. 3 pp Ledo O. and M. Wolf mproved esmaon of he covarance marx of sock reurns wh an applcaon o porfolo selecon Journal of Emprcal Fnance Vol. 10 No. 5 pp Lee C. and B. Swamnahan rce Momenum and Tradng Volume The Journal of Fnance Vol. 55 pp L B. and B. Lu A Varance-Rao Tes of Random Walk n nernaonal Sock Markes The Emprcal Economcs Leers Vol. 11 No. 8. Macas J. B. and L. Massa The Global Fnancal Crss and Sub-Saharan Afrca: The Effecs of Slowng rvae Capal nflows on Growh Workng aper No. 304 London: Overseas Developmen nsue. Markowz H orfolo Selecon The Journal of Fnance Vol. 7 No. 1 pp Mohammed F. A Sock Msprcng and Corporae nvesmen Decsons hd Thess submed o he Faculy of he Graduae College of he Oklahoma Sae Unversy Uned Saes. Musapha S. A Asse Volaly and rcng n he Ngeran Sock Marke unpublshed hd Thess submed o he Deparmen of Economcs and Sascs Unversy of Benn Benn Cy Ngera. Osakwe. N Afrca and The Global Fnancal and Economc Crss: mpacs Responses and Opporunes. n Dullen e al. The Fnancal and Economc Crss of and Developng Counres :

22 anageas S. S.. Kohar A. avlova J. oerba A. Schoar D. Vayanos and L. Vernng Speculaon Overprcng and nvesmen: Theory and Emprcal Evdence Mmeo MT. ásor L. and R. F. Sambaugh Lqudy Rsk and Expeced Sock Reurns Journal of olcal Economy Vol. 111 No olk C. and. Sapenza The Sock Marke and Corporae nvesmen: A Tes of Caerng Theory The Revew of Fnancal Sudes Vol. 22 No. 1 pp oerba J. and L. Summers Mean Reverson n Sock rces Journal of Fnancal Economcs Vol. 22 No. 1 pp Sadka R Momenum and os-earnngs Announcemen Drf Anomales: The Role of Lqudy Rsk Journal of Fnancal Economcs Vol. 80 No. 2 pp Summers L Taxaon and Corporae nvesmen: A q-theorec Approach Brookngs apers on Economc Acvy Vol. 1 pp Swamnahan B Tme-Varyng Expeced Small Frm Reurns and Closed-end Fund Dscouns Revew of Fnancal Sudes Vol. 9 pp Tobn J A General Equlbrum Approach o Moneary Theory Journal of Money Cred and Bankng Vol. 1 No. 1 pp Vvan A. and M. E. Wohar Commody Volaly Breaks Journal of nernaonal Fnancal Markes nsuons and Money Vol. 22 No. 2 pp von Fursenberg G Corporae nvesmen: Does Marke Valuaon Maer n he Aggregae? Brookngs apers on Economc Acvy No Wang S. F. Zhao and D. Wang The Effec of Sock Msprcng on nvesmen Evdence from Chna Workng aper Shenzhen Graduae School Harbn nsue of Technology. World Bank The mpac of he Global Fnancal Crss on Fnancal Markes n Sub- Saharan Afrca Fnance and rvae Secor Developmen Afrcan Regon Washngon DC: World Bank. Yan L. and. Garca orfolo nvesmen: Are Commodes useful? roceedngs of he NCR-134 Conference on Appled Commody rce Analyss Forecasng and Marke Rsk Managemen S. Lous Mssour. 20

23 Annexure 1: Summary Sascs of Reurns and Rsks Reurns/ Rsks Mean Sd. Dev. percen percen Skewness Kuross JB Tes Saonary Tes Counres ADF-Sas d Egyp * Morocco * Ngera * Souh Afrca * orfolos Egyp Bg-sze * Egyp Med.- sze * Egyp Smallsze * Morocco Bgsze ** Morocco Med.- sze * Morocco Smallsze * Ngera Bg-sze * Ngera Med.- sze ** Ngera Smallsze * Souh Afrca Bg-sze * Souh Afrca Med.-sze * Souh Afrca Small-sze * Rsks Egyp Lqudy ** Morocco Lqudy * Ngera Lqudy ** Souh Afrca Lqudy ** Egyp Volaly Morocco Volaly * Ngera Volaly ** Souh Afrca Volaly ** Source: Naonal Sock Exchange webses Bloomberg Termnal and Auhor s Compuaon. Daa on Afrcan equy ndces and commody prces are from he Bloomberg radng ermnal. Socks are sored no hree dfferen porfolos bg medum and small szes. Ths s done based on frm s volume raded and volaly. The lqudy rsk s compued usng he sandard devaon of he change n frms volume raded 21

24 lq rsk L L 1/ 2. Ths s conssen wh Brennan and Wang Volaly s he marke sysemac volaly whch s obaned from he sandard devaon of he daly sock prces. The J-B es s sgnfcan a 99 percen confdence level for almos all he varables. Hence here s rch evdence o rejec he null hypohess. Annexure 1 connued: Resuls of Auocorrelaon and Heeroscedascy Tess Selec Afrcan Equy Dagnosc Tess Egyp Morocco Ngera Souh Afrca Ljung-Box Q 12 lags ARCH 12 lags Source: Auhor s Compuaon; underlyng daa are from he Bloomberg Termnal. The probables of he ch-square sascs of he Ljung-Box Q and he ARCH ess are repored. The resuls show he presence of auocorrelaon and paral auocorrelaon n he reurns of eques and commodes seleced. Agan a 12 lags here s absence of ARCH effec n he reurn seres. 22

25 Annexure 2: Msprcng of orfolos of Eques usng Alernave Specfcaon anel A: Resuls of Msprcng of Equy orfolos sored by Sze Egyp and Morocco Raos EGYT MOROCCO Bg-Sze orf. Med.-Sze orf. Small-Sze orf. Bg-Sze orf. Med.-Sze orf. Small-Sze orf. coef. volaly coef. volaly coef. volaly coef. volaly coef. volaly coef. volaly VR VR VR VR Adj R-SQRD 6.71% 7.01% 6.18% 8.14% 8.27% 3.99% anel B: Resuls of Msprcng of Equy orfolos sored by Sze Ngera and Souh Afrca Raos NGERA SOUTH AFRCA Bg-Sze orf. Med-Sze orf. Small-Sze orf. Bg-Sze orf. Med-Sze orf. Small-Sze orf. coef. volaly coef. volaly coef. volaly coef. volaly coef. volaly coef. volaly VR VR VR VR Adj R-SQRD 5.82% 6.18% 4.49% 5.70% 6.73% 6.24% Esmaes are obaned from he Black CAM specfcaon. The Black CAM was developed by Fscher Black n 1972 afer he novel work of Sharpe 1964 Lnner 1965 and Mossn The Black CAM does no consder he rskless asse and herefore dd no adjus he reurns boh marke and frms reurns for rsk-free rae. The porfolos are sored based on frms lqudy no Bg-sze Medum-sze and Small-sze. The varance raos for varous numbers of days and her respecve volales are repored. The adjused R-squared was also presened. The models esmaed for each of he counres where he resduals used o generae he varance rao and volales are exraced are avalable based on reques. We flou for clary of presenaon. Underlyng daa have been sourced from he webse of each of he seleced Sock Exchanges and Reuers and range from 5 January 2010 o 30 December

26 Annexure 3: mpac of Msprcng on Changes n Toal-nvesmen n Seleced Afrcan Exchanges Classes of Sock orfolos Dependen Varable Bg Medum Small 1 Ms V anel A: Egyp Coeffcens * * sascs R-Squared Adjused R- Squared No. of Observaons anel B: Morocco Coeffcens * * * * *** -sascs R-Squared Adjused R- Squared No. of Observaons anel C: Ngera Coeffcens * ** ** * * -sascs R-Squared Adjused R- Squared No. of Observaons anel D: Souh Afrca Coeffcens * * ** ** -sascs R-Squared Adjused R- Squared No. of Observaons Source: Auhor s Compuaon. The dependen varable s oal change n nvesmen whch s he Ms V Ms 1 dfference beween he average volume of ransacons a me and -1 dvded by he oal volume of ransacon a me -1. The explanaory facors nclude aggregae msprcng and over-valuaon. The over-valuaon was consdered n he model because prevous sudes have recognzed ha over-valuaon ncreases he effec of he fnancal crses on he performances of Afrcan Sock Exchanges. The underlyng daa conan Afrcan eques fallng beween 5 January 2010 and 30 December The -sascs are repored for sgnfcance of varables and coeffcens wh asersks one wo and hree because hey are sascally sgnfcan a 1 5 and 10 percen respecvely. V 24

27 Annexure 4: mpac of Msprcng on Over-nvesmen n Seleced Afrcan Exchanges Classes of Sock orfolos Dependen Varable Bg Medum Small 1 Ms V anel A: Egyp Coeffcens ** *** sascs R-Squared Adjused R- Squared No. of Observaons anel B: Morocco Coeffcens * * * * sascs R-Squared Adjused R- Squared No. of Observaons anel C: Ngera Coeffcens ** *** *** ** sascs R-Squared Adjused R- Squared No. of Observaons anel D: Souh Afrca Coeffcens * * ** ** -sascs R-Squared Adjused R- Squared No. of Observaons Source: Auhor s Compuaon The dependen varable s over-nvesmen whch s he posve dfference beween he average 1 volume of ransacons a me and -1 dvded by he oal volume of ransacon a me -1. The explanaory facors nclude aggregae msprcng and over-valuaon. The over-valuaon was consdered n he model because prevous sudes have recognzed ha hs ncreases he effec of he fnancal crses on he performances of Afrcan Sock Exchanges. The underlyng daa conan Afrcan eques fallng beween 5 January 2010 and 30 December The -sascs are repored for sgnfcance of varables and coeffcens wh asersks one wo and hree because hey are sascally sgnfcan a 1 5 and 10 percen respecvely. Ms V Ms V 25

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