The efficiency of African equity markets

David G. McMillan (School of Management, University of St Andrews, St Andrews, UK)
Pako Thupayagale (School of Management, University of St Andrews, St Andrews, UK)

Studies in Economics and Finance

ISSN: 1086-7376

Publication date: 2 October 2009

Abstract

Purpose

In order to assess the informational efficiency of African equity markets (AEMs), the purpose of this paper is to examine long memory in both equity returns and volatility using auto‐regressive fractionally integrated moving average (ARFIMA)‐FIGARCH/hyperbolic GARCH (HYGARCH) models.

Design/methodology/approach

In order to test for long memory, the behaviour of the auto‐correlation function for 11 AEMs is examined. Following the graphical analysis, the authors proceed to estimate ARFIMA‐FIGARCH and ARFIMA‐HYGARCH models, specifically designed to capture long‐memory dynamics.

Findings

The results show that these markets (largely) display a predictable component in returns; while evidence of long memory in volatility is very mixed. In comparison, results from the control of the UK and USA show short memory in returns while evidence of long memory in volatility is mixed. These results show that the behaviour of equity market returns and risks are dissimilar across markets and this may have implications for portfolio diversification and risk management strategies.

Practical implications

The results of the analysis may have important implications for portfolio diversification and risk management strategies.

Originality/value

The importance of this paper lies in it being the first to systematically analyse long‐memory dynamics for a range of AEMs. African markets are becoming increasingly important as a source of international portfolio diversification and risk management. Hence, the results here have implication for the conduct of international portfolio building, asset pricing and hedging.

Keywords

Citation

McMillan, D. and Thupayagale, P. (2009), "The efficiency of African equity markets", Studies in Economics and Finance, Vol. 26 No. 4, pp. 275-292. https://doi.org/10.1108/10867370910995726

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Publisher

:

Emerald Group Publishing Limited

Copyright © 2009, Emerald Group Publishing Limited

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