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Explaining stock market returns in Sub-Saharan Africa using an alternate uncovered interest rate parity framework

Kofi Bondzie Afful (Business School, Ghana Institute of Management and Public Administration, Accra, Ghana)
William Opoku (Business School, African University College of Communications, Accra, Ghana)

International Journal of Emerging Markets

ISSN: 1746-8809

Article publication date: 23 May 2020

Issue publication date: 22 June 2021




Sub-Saharan African (SSA) stock exchanges are imperfect and inefficient. Therefore, orthodox finance theories are unable to completely explain their market returns. Such models mainly identify anomalies when applied to the sub-region. Consequently, this paper develops an original theoretical model to better explain market returns on the sub-continent.


This paper develops an alternate analytical framework that combines adaptive expectations, Keynesian LM model and modified uncovered interest parity (UIP) formulations to address empirical anomalies identified by previous literature when analyzing SSA's inefficient stock markets. Using panel data, the study first computes the fixed as well as random effects regressions and, later, a Generalized Method of Moments (GMM) dynamic panel regression for further empirical analysis.


Both the fixed and random effects regression results indicate that the relative output-money supply disparity and foreign inflation-money supply growth rate spread have positive effects on market returns in SSA. On the other hand, foreign interest rates have an inverse effect. Although the GMM dynamic panel regression has similar results, it additionally finds that market returns in SSA are autoregressive. This suggests that past returns are persistent.

Research limitations/implications

A key implication is that multipliers and transmission mechanisms in SSA may take longer to adjust, thereby limiting short-run market returns. Also, policymakers must encourage a critical mass of firms to list in order to enhance efficiency. Additionally, policy variables significantly influence returns. One limitation is the high market segmentation in SSA. This heightens heterogeneity, emphasizing fixed effects.

Practical implications

Also, the findings of this study may not apply to all emerging economies as SSA economies are highly heterogeneous.

Social implications

The segmented nature of SSA stock markets may have implications for income inequality and the distribution of resources within the economy. Also, it indicates that there are limits to how firms use capital markets on the sub-continent.


This paper abstracts from the strict ideal market conditions prescribed by modern finance theories and develops an original modified UIP model. It finds that SSA stock markets may be more sensitive to policy variables, instead of determinants postulated by orthodox finance concepts. The study offers opportunities for further critical examination of returns in imperfect frontier markets.



The authors are highly indebted to Prof. Henrique Castro Martins, the editor and anonymous referees for their very helpful comments.


Bondzie Afful, K. and Opoku, W. (2021), "Explaining stock market returns in Sub-Saharan Africa using an alternate uncovered interest rate parity framework", International Journal of Emerging Markets, Vol. 16 No. 4, pp. 865-882.



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