Stock (Mis) pricing and Diversification in Africa: Evidence from selected African Exchanges


Department of Economics, Accounting and Finance, College of Management Sciences, Bell University of Technology


This paper ascertains the extent of mispricing in equity portfolios, mispricing-divestment 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. Third, there is a clear manifestation of strong, safe havens between South Africa and Cocoa markets; Egypt and Platinum markets; and Morocco and Oil markets, respectively. However, the Nigerian equities can be a successful diversifier for oil and cocoa during market turmoil. 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. The paper recommends the jettisoning of Investors’ buy and hold trading strategy and encouraging of the establishment of African commodity exchange to achieving the desired inclusive growth.