Conditional pricing of currency risk in Africa's equity markets |
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| Institution: | 1. DRM Finance, Université Paris Dauphine, Place du Maréchal de Lattre de Tassigny, 75775 Paris Cedex 16, France;2. IPAG Business School (IPAG Lab), 184 Boulevard Saint-Germain, 75006 Paris, France;3. Université Paris 8 (LED), 2 rue de la Liberté, 93526 Saint-Denis Cedex, France;1. Central University of Finance and Economics, Beijing, China;2. KU Leuven, Faculty of Economics and Business, Leuven, Belgium;1. School of Finance, Nanjing Audit University, 211815, Jiangsu, PR China;2. Department of Economics and Management, University of Buea, PO Box 63, Buea, Cameroon;3. School of Business Administration, Shaoxing University of Art and Sciences, 312000, Zhejiang, PR China;1. EconomiX, UPL, University Paris Nanterre, CNRS, F92000 Nanterre, France;2. LEO, UMR 7322, University of Orléans, F-45067 Orléans, France |
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| Abstract: | In this paper, we sought to establish whether Africa's volatile currencies drive equity risk premia. We use the SDF framework to estimate various conditional specifications of the International Capital Asset Pricing Model through generalized method of moments technique. Our results show strong evidence of conditional, time-varying currency risk premia in equity returns. Currency risk is also perceived by international investors as important in informing the equities pricing kernel. Interestingly, we find evidence that international investors are concerned about Africa's small size equity markets and build the impact of anticipated low trading into their pricing calculus. |
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