SSRN Id1366845

Sector Cost of Equity in African Equity Markets
Bruce Hearn
Sir John Cass Business School, and
Kings College London
and
Jenifer Piesse*
Kings College London, and
University of Stellenbosch, RSA
Abstract
This paper assesses the effectiveness of Liu (2006) metrics in measuring illiquidity within a
multifactor CAPM pricing model. Costs of equity are estimated using this model for the
major sectors within Africas major equity markets: Morocco, Tunisia, Egypt, Kenya,
Nigeria, Zambia, Botswana and South Africa. Costs of equity are found to be highest in the
Financial sectors of all countries and on an aggregate basis in Nigeria and Zambia while
being lowest in Tunisia, Morocco, Namibia and South Africas blue chip stocks.
JEL classification: G12, G15, O16

Keywords: Africa, Capital Asset Pricing Model, Liquidity, Emerging Financial Markets
*
Corresponding author: Department of Management, Kings College London, 150 Stamford
St, London SE1 9HN. Tel: 44(0)207 848 4164. Email: jenifer.piesse@kcl.ac.uk
Electronic copy available at: http://ssrn.com/abstract=1366845

Sector Cost of Equity in African Equity Markets
Abstract
This paper assesses the effectiveness of Liu (2006) metrics in measuring illiquidity within a
multifactor CAPM pricing model. Costs of equity are estimated using this model for the
major sectors within Africas major equity markets: Morocco, Tunisia, Egypt, Kenya,
Nigeria, Zambia, Botswana and South Africa. Costs of equity are found to be highest in the
Financial sectors of all countries and on an aggregate basis in Nigeria and Zambia while
being lowest in Tunisia, Morocco, Namibia and South Africas blue chip stocks.
1. INTRODUCTION
The rapid establishment and development of equity markets across African since the demise
of the Cold War and subsequent restructuring of global capital flows has been associated with
the motivation of many countries to attract foreign investment. The attraction of Foreign
Direct Investment (FDI) and portfolio investment is essential in supplementing low domestic
savings rates despite political concerns relating to the potential loss of sovereignty of national
assets and vulnerabilities associated with financial contagion. African securities markets have
achieved significant institutional development during the last decade and strive to provide
attractive and competitive venues for firms seeking to raise funds for much needed industrial
and development projects. However issues relating to extreme illiquidity and segmentation
are cited as major concerns of both potential investors as well as firms seeking to raise capital
from cheaper sources and diversify ownership through a domestic listing (Lesmond, 2005;
Hearn et al., 2009). African securities markets are a particularly interesting region for study
given that the current development policy drive towards integration is being actively pursued
by regional bodies such as the New Africa Partnership for Development (NEPAD) and
African Stock Exchanges Association (ASEA) towards integration. The continent has a wide
variety of markets at very different levels of development, with South Africa being the largest
and most developed. Other distinctive regions include those of North Africa where markets
fall under the influence of French civil code law (La Porta et al, 2008), as opposed to English
common law, and East Africa, where advanced preparations are underway for Kenya to act as
a regional integrated hub market.
Liquidity by its very nature has proved a difficult concept to define. Much of this
difficulty has arisen through its ability to transcend a number of transactional properties of
markets including tightness, depth, resiliency (Lesmond, 2005) and information (OHara,
2003). Empirically defined constructs designed to capture this phenomenon centre on
measurement of direct trading costs, such as tightness, which is measured by the bid-ask
Electronic copy available at: http://ssrn.com/abstract=1366845

spread (quoted or effective) and indirect trading costs, linked to depth and resiliency, which
are often represented by price impact measures. The lack of reliable and consistent bid-ask
quotes in many emerging markets infers the use of market activity proxies in capturing
liquidity. However there is little consensus regarding the applicability and efficacy of
ubiquitous measures such as turnover and the more recently developed price impact variable
of Amihud (2002) (Lesmond, 2005). However the importance of the inclusion of liquidity
measurement within pricing models and cost of equity analysis is merited by the questionable
performance of single-factor pricing models. Collins and Abrahamson (2006) provide costs
of equity estimates for a variety of African markets but the analysis falters on the various
forms of one-factor model used to model industrial sector time series. The presence of severe
illiquidity infers a high degree of price-rigidity which in lowers both variances and
covariances between series (Hearn and Piesse, 2009). This adds a significant bias in betas, or
their proxies, within CAPM type pricing models. Equally costs of equity estimated through
standard one-factor CAPM models (Correia and Uliana, 2004) fail to take into account the
well documented effects of size and liquidity in explaining the cross section of returns
(Martinez et al, 2005).
While the literature concerning the importance of liquidity been prominent for over a
decade research concerning liquidity risk and its applications is much more recent. Pastor and
Stambaugh (2003) find evidence that investors employing leverage and facing solvency
constraints do require higher expected returns for holding assets that are difficult to sell when
aggregate liquidity is low. Furthermore stocks with a higher sensitivity to aggregate liquidity
generate higher returns than low-sensitivity stocks inferring that liquidity is an important state
variable for asset pricing. The inability of the traditional CAPM and the three factor
augmented CAPM of Fama and French (1993), seeking to describe the cross section of asset
returns with additional size and book-to-market factors, in capturing liquidity effects
represents a serious caveat in asset pricing (Liu, 2006). Liu (2006) in line with Daniel and
Titman (1997) finds considerable evidence of the limited explanatory power of the Fama and
French model in capturing the cross section of asset returns. Martinez et al (2005) also
present evidence of the limited explanatory power of the Fama and French three factor model
although there is some evidence of some explanatory power in retaining the size factor. In
addition to questions regarding the benefits of including the book-to-market variable there are
serious limitations in obtaining consistent accounting book values of firms from emerging
markets. Furthermore emerging stock markets are highly skewed with many being dominated
by a handful of large firms with the rest of market being populated with SMEs. As such a
size factor should be retained within the pricing model in explaining the cross section of
returns. This study finds evidence that the liquidity and size factors are significant in
explaining cross section of returns and outperforms the traditional CAPM. In line with the
3
findings of Liu (2006), the state nature of liquidity as well as the conjecture that liquidity risk
better captures firm distress risk, and the associated solvency issues, than the combination of
size and book-to-market factors used in Fama and French model, explains the improved
performance of the size and liquidity augmented model used in this work. The success of this
multifactor CAPM provides support for the continued use of the risk-return paradigm in asset
valuation.
This paper is structured as follows. Section 2 has three distinct parts: the first
provides an overview of the institutional features of Africas markets, the second introduces
the liquidity measures and their construction, while the third discusses data specific issues.
Section 3 outlines the three-factor size and liquidity augmented CAPM. Section 4 discusses
the empirical results. The final section concludes and provides development policy inferences
from the evidence presented in this paper.
2. AFRICAN EQUITY MARKETS AND LIQUIDITY MEASUREMENT
(i). Africas securities markets

The principal characteristics of these markets are summarised below (see Piesse and Hearn
(2005) for an extended discussion of African stock markets):
North Africa
The Egyptian stock exchange is one of the oldest in Africa having been formed through the
integration of the stock exchange of Alexandria, established in 1888, and Cairo, established in
1903. Trading is electronic and between floor-based appointees of local brokerage firms and
occurs within three markets: an OTC market, a Primary Dealers Bonds market, and a Listed
Securities market. The latter is formed of a pre-opening session from 9.45am to 10-15am
followed by continuous trading between 10-30am and 14-30pm five days per week. A central
depository, CSD, exists in order to assist settlement which is generally in partial compliance
with G30 recommendations and a number of large well capitalized custodian banks exist in
order to assist overseas investors (CASE website, 2009).
The Bourse de Casablanca, Morocco, was established in 1929. Trading is electronic
with terminals installed in the local brokerage community while settlement is undertaken
through the G30 compliant MAROCLEAR, the national CSD, which was established in 1998
(Bourse de Casablanca website, 2009). Trading is reported electronically to market
participants and to international data vendors such as Bloomberg and Reuters. This gives the
market the opportunity to attract overseas investors. Stock market awareness is high and the
exchange is used as a successful route for domestic flotation, although it also attracts
significant retail and institutional investors.
4
The Bourse de Tunis was established in 1969 with trading being undertaken
electronically on the NSC system developed in 1996 through the assistance of Euronext Paris.
The NSC system is split into fixing and continuous systems, with the former handling small
and illiquid securities and being comprised of a series of sequential electronic call auctions
(Bourse de Tunis website, 2009). Trading hours in continuous market are 9-00am to 14-
10pm in the months outside July, August and Ramadan where hours are 8-30am to 12-10pm.
Settlement is fully compliant with G30 guidelines. However there is little domestic stock
market culture and only an estimated 5% of finance raised by firms in 2007 was done so
through the stock exchange (Zribi, 2008).
Tables 1 and 2
West Africa
While there are two smaller exchanges in Cote dIvoire, the BRVM, and Ghana the
considerable issues concerning severe illiquidity (Hearn and Piesse, 2009) and contrasting
motives behind the establishment of these exchanges (Lavelle, 2001) have motivated this
analysis to focus solely on the larger and more liquid Nigerian stock exchange.
The Nigerian stock exchange was originally established in 1960 as the Lagos stock
exchange with 19 listed firms. Although the exchange has established various branches
around the country including Kaduna (1961) and Abuja (1999) (Nigerian Stock Exchange,
2009) activity remains concentrated in Lagos. Trading is undertaken using an electronic
automated trading system (ATS) on a daily basis from 11-00am to 14-00pm and settlement is
partially compliant with G30 1 requirements due to the presence of a CSD, created in 1992,
and international custodian banks. The network of 219 brokers alongside the 234 listed firms
ensures it is the largest market in West Africa and although trading activity and capitalization
is less concentrated than its neighbouring markets the financial sector accounts for 59.74% of
market capitalization, as seen in Table 1. However although internationally recognised
auditors and accountants are present in the market there are considerable differences in the
application of these International Accounting Standards (IAS) within listed firms. Many
poorly capitalized firms are unable to afford the considerable fixed costs of regular
professional auditing and there are additional ambiguities concerning the continued use and
overlap of Nigerian accounting standards and their international counterparts. Consequently
1
G30 relates to the Group of Thirty which is the most influential body to encourage the standardisation
and improvement in global securities administration. Following a symposium in London in March
1989, the following recommendations were agreed: i) Brokers should match trades on day after deal
date (T+1); ii) Trade confirmation on trade day plus 2 days (T+2); iii) Central Depository for safe
keeping of shares; iv) Net basis settlement of cash and stock; v) Settlement takes place as delivery vs.
payment or receipt vs. payment; vi) Settlement in same day funds; vii Settlement effected on trade
date plus 3 days (T+3) 8; viii) Securities lending should be permitted; ix) International securities
numbering system must be adopted (ISIN code).
5
corporate governance is a costly luxury for those few firms that have sufficient capitalization
and can afford to comply.
East Africa
The Nairobi Stock Exchange (NSE) was initially established as an informal share market
during the 1920s before being incorporated in 1954. Since 1994 the market has occupied the
same premises as the central depository and The Nation business journal which disseminates
trading information. Trading takes place daily by a central electronic book entry system, and
is limited to the floor of the exchange between 10-00am and 12-00. The market is dominated
by blockholders and smaller retail investors and free float percentages are low 2 . Order flow
to the market is by a small network of licensed stock brokers and their regional affiliates.
Investors are required to establish both a trading account with the broker and a separate
individual account at the central depository. Public releases of shares in the primary market
and IPOs are managed through local investment banks, with the Capital Markets Authority
responsible for regulation and supervision.
Southern Africa
The Johannesburg Securities Exchange in South Africa is the oldest and largest market in
Africa having been established in 1887. A sophisticated electronic trading system has been
adopted by the market since the disbanding of the former open outcry system in 1996. This
system was extended to become a regional trading system linking the integrated market of
neighbouring Namibia in 1998 and upgraded in 2002 under the guidance of the London stock
exchange to the current Shares Electronically Traded, or SETS, system. A central depository
exists, the Southern African Financial Instruments Clearing and Settlement System
(SAFICAS), which is based on technology used in the Swiss stock exchange, and the market
adheres to high levels of corporate governance, the King I and II reports 3 , and regulatory
standards (JSE website, 2009). Namibia is almost identical to its neighbour in many ways
owing to a shared colonial past which has given rise to common legal heritage, institutions,
and joint membership of the Common Monetary Area (CMA) 4 and South African Customs
Union (SACU) (Hearn and Piesse, 2002).
The Botswana stock exchange was established as an OTC share market in 1989
before trading was formalised in 1995 as a call auction five days per week from 10-00am to
12-00pm. The exchange has 20 listed companies, as outlines in Table 1, though the financial
2
That is the proportion of shares available to the public and not held by incumbent block holders.
3
The King Reports that regulate corporate governance practices in South Africa is very similar to the
UK Cadbury Report and the US Sarbanes-Oxley Act (South African Institute of Directors, 2009)
4
Common Monetary Area (CMA) countries include Namibia, Swaziland and Lesotho as well as South
Africa. Member states currencies are pegged to the Rand and form an economic union.
6
sector accounts for over 85% of market capitalization. Order flow is precipitated through four
locally based brokers and the market provides limited risk diversification opportunities for the
small institutional investment community, mostly made up of pension funds (Jefferis, 1995).
A fully G30 compliant CSD is present to facilitate payment and settlement of trades. Owing
to Botswanas close geographical proximity to South Africa the market is heavily influenced
by prevailing corporate governance standards in its neighbour. This is further reinforced by a
sizeable number of locally listed blue chip South African firms adhering to a high quality
regime of governance, accounting and auditing standards.
The Lusaka stock exchange in Zambia was established in 1994 with technical
assistance from the International Finance Corporation (IFC) and the World Bank. Trading is
undertaken via a delocalised electronic system amongst the three brokers with a pre-opening
call auction undertaken between 9-00am and 10-00am followed by a continuous auction from
10-00am to 13-00pm five days per week. A fully G30 compliant CSD is present to facilitate
payment and settlement of trades and the Securities and Exchange Commission (SEC) has
regulatory oversight of the market. However the evidence in Table 1 suggests that the market
is highly concentrated with one stock alone accounting for 32.85% of capitalization and
18.12% turnover. Corporate governance in Zambia is still in its infancy with local indigenous
firms making up the majority of local listings and those foreign, mostly South African, firms
that do exist listing very small percentages of their total number of shares available (Old
Mutual, 2009). Equally the formal sector is small and concentrated on the Consumer non-
cyclical, Financial and Communications industries, reflected in the listed capitalizations in
Table 1, with the informal sector dominating the economy.
(ii). Liquidity constructs

The Bid Ask spread and commission cost
The Bid Ask spread and commission cost: The data on the end of month bid and ask quotes
were collected from Datastream for Morocco, Egypt and South Africa, Bloomberg for
Tunisia. Data were unavailable for Namibia, Botswana, Nigeria and Zambia. There is
considerable variation in the length of intraday data with Morocco and Tunisia being
available for over 15 years and Egypt and South Africa from 2000. Because of
inconsistencies between the various data sources some was obtained directly from the
markets. The bid-ask spread is calculated using the average of the available monthly quotes
and incorporates at a minimum a single months quote for that month. The average bid-ask
spread spanning the quarter is used for the estimate of the spread. This procedure minimizes
outlier problems and averages out the recording of either highs or lows in quotes resulting
from monthly sampling. Following Lesmond (2005) bid-ask spreads that exceed 80% are
trimmed as these are potentially errors. The monthly quoted spread is defined as:
7
( Ask M Bid M ) ( Ask M 1 Bid M 1 ) (1)
Quoted spread M = 1 / 2 +
( Ask M + Bid M ) / 2 ( Ask M 1 + Bid M 1 ) / 2
In order to estimate the total trading transaction costs, the costs associated with a
round trade are added to the quoted spread for each month. Brokerage and Exchange fees are
calculated from the fee schedules in Appendix 1. When a percentage commission fee is not
provided the maximum fixed cost is applied to the aggregate daily traded value data.
Liu (2006) measure

Daily price and volume data are collected from Datastream. The measure is derived from the
recent work of Liu (2006) and is defined as LMx which is the standardized turnover-adjusted
number of zero daily trading volumes over the prior x months (x = 1, 6, 12) i.e.
1/x month turnover 21x
LM x = (Number of zero daily volumes in prior x months) + NoTD
(2)
Deflator
where x month turnover is the turnover over the prior x months, calculated as the sum of the
daily turnover over the prior x months, daily turnover is the ratio of the number of shares
traded on a day to the number of shares outstanding at the end of the day, NoTD is the total
number of trading days in the market over the prior x months, and Deflator is chosen such
that,
1
0
(x month turnover ) 1 (3)
Deflator
for all sample stocks 5 . Given the turnover adjustment (the second term in brackets in first
expression), two stocks with the same integer number of zero daily trading volumes can be
distinguished: the one with the larger turnover is more liquid. As such the turnover
adjustment acts as a tie-breaker when sorting stocks based on the number of zero daily trading
volumes over the prior x months. Because the number of trading days can vary from 15 to
23, multiplication by the factor (21x/ NoTD) standardizes the number of trading days in a
month to 21 which makes the liquidity measure comparable over time. LM1 can be
interpreted as the turnover-adjusted number of zero daily trading volumes over the prior 21
trading days, which is the approximate average number of trading days in a month. The
liquidity measure, LMx is calculated at the end of each month for each individual stock based
on daily data. Daily data is available for all markets across entire sample period.
(iii). Data: Sources
5
In line with Liu (2006) a deflator of 1,000 is used in constructing estimates for LM1
8
Daily stock closing, bid and ask prices, total number of shares outstanding, traded volumes,
dividend per share in local currency and converted into UK were obtained for Egypt,
Morocco and South Africa from Datastream. These variables were sourced from both
Bloomberg and the national stock exchanges for Tunisia, Nigeria, Botswana, Zambia and
Namibia. These data formed the basis of calculation of the daily return variance, or volatility,
market capitalization, defined as total number of shares outstanding multiplied by daily
closing price, and various liquidity constructs. The total returns series for each stock were
sourced direct from Datastream for Kenya, Morocco, Egypt and South Africa while they had
to be constructed for Nigeria, Tunisia, Zambia, Botswana and Namibia using the procedures
employed by Standard & Poors in assuming reinvestment of dividends and taking account of
stock splits, rights issues and other corporate actions affecting a stocks intrinsic value.
Exchange rate and UK- Gilt/Treasury yield data are sourced from Datastream. The one-
month UK-Gilt/Treasury Bill yield rate represents the risk free rate although this is adjusted
to take account of monthly excess returns as opposed to the quoted equivalent annualised
rates. The conversion of the total returns series and prices into sterling and the use of UK -
Gilt/Treasury yield rate assumes long term parity between individual domestic currencies and
sterling. In many cases companies were deleted from sample owing to either data
inconsistencies or the lack of availability of certain variables that rendered the generation of
total returns impossible. Nigeria is one example where there are 234 listings yet 60 of these
do not have data and a further 45 firms are missing one critical determinant needed for the
generation of total returns indices. Consequently the sample size for Nigeria is 129 firms.
(iv). Data: Summary statistics relating to liquidity measures

The skewed nature and considerable differences in liquidity within Africas equity markets is
shown in Table 3. This provides a unique contrast of the mean cross section values for daily
percentage zero returns, stock prices, traded volumes, market capitalization and bid-ask
spreads for the component firms both within the overall market, the top tier stocks, as ranked
by market capitalization, and for the largest sectors, as shown earlier in Table 1. The top tier
bracket of stocks for the markets of Egypt, Morocco, Nigeria and South Africa contain 10
firms, while those for Kenya and Tunisia have 5 firms and finally Botswana and Zambia have
3 firms. There is clear evidence of a size and liquidity effect in all the markets, with the mean
cross sectional capitalizations of the top tier stocks in each case often being larger than the
aggregate market by several orders of magnitude. Similarly there are considerable differences
between the top tier stocks and aggregate market in terms of size of the bid-ask spread, where
the mean bid-ask spread of the top tier is a mere 3.40% of the mean for the overall market as
in the case of South Africa. These differences within the markets are further reflected by the
differences between industrial sectors. Even taking into account that only the largest sectors,
9
as ranked by market capitalisation earlier in Table 1, have been used there are considerable
contrasts. Interestingly in all the African markets although the financials sector form the
highest profile listings in the continent and a steady source of blue chip listings to the
exchanges their liquidity profile is poor in contrast to the top tier stocks and often only
marginally better than that of the aggregate market. Percentage daily zero returns as well as
bid-ask spreads, where available, reveal that in all cases liquidity is only marginally less than
the overall market and considerably lower than for the top tier stocks. However the greatest
degree of illiquidity that is fairly consistent across all groupings of firms is in Botswana,
Namibia, Zambia. Zambia has a value of 89.75% for aggregate market dropping to 79.44%
for the top 3 stocks. Similarly Botswana drops from 90.49% for the aggregate market to
86.13% for the top 3 stocks. Namibia is the most illiquid markets with the percentage daily
zero returns being over 92% for aggregate local market further demonstrating the severe price
rigidity present in these markets. These results form the basis of the critique in this study
regarding the estimation of the cost of equity in African markets using standard techniques
that do not take account of either issues relating to the segmentation of the continents markets
nor of the severe illiquidity present. The severity of the illiquidity, reflected in price-rigidity,
downwardly deflates variances and covariances of stocks and renders the conventional
application of CAPM market betas inaccurate.
Table 3
3. EMPIRICAL MODEL: SIZE AND LIQUIDITY AUGMENTED CAPM

In the spirit of the three-factor CAPM model of Fama and French (1993) this work follows
the reasoning of the more recent work of Martinez et al (2005) and Shum and Tang (2005) in
modifying the augmented factors to take account of size and liquidity effects that offer
improved performance in capturing anomalies across the cross section of stock returns which
are particularly prevalent in emerging markets. Thus, in addition to the market excess returns,
the model is augmented by the excess returns attributed to size (SMB), and the excess returns
attributed to illiquidity (ILLIQ).
The market, size and liquidity factors used in the CAPM model are formed through
the universe of available stocks being sorted into equally weighted portfolios with rebalancing
being undertaken each December of every year from 2002 to 2008 inclusive. All stocks are
assumed to be held continuously for a further year following rebalancing. The market
portfolio itself is the simple arithmetic mean of the cross section of total returns in the
universe. This universe is sorted each December first by each stocks market capitalization
with the subsequent formation of three size ranked portfolios, Small, Medium, and Big,
and then each of the individual three size ranked portfolios is further sorted into another three
portfolios based upon the liquidity measure. The size factor is formed from the cross
10
sectional mean returns of the small size portfolio minus the big size portfolio and is referred
to as the SMB factor, in line with the original notation of Fama and French (1993). Given the
Amihud liquidity construct outperforms the turnover construct in capturing the effects of
liquidity within the sample group markets this is used in the ranking process of sorting stocks
into portfolios based on their relative liquidity. Consequently the liquidity factor is formed
from the mean of each of the three High illiquidity sorted portfolios, formed from having
sorted the size portfolios, minus the mean of the Low illiquidity portfolios, resulting in a
HML factor, in line with notation of Liu (2006). The construction of the market variable is
complicated by the lack of appropriate regional benchmarks in the Sub Saharan African
region overall. It is further complicated by the unreasonable assumptions that full integration
of asset markets would impose on the highly segmented markets across the continent.
Consequently a North African universe was formed including Egypt, Tunisia and Morocco
and a South African universe was formed from South Africa and Namibia, which by virtue of
its shared trading link is reasonably included within the South African universe. Finally a
Sub Saharan universe was formed including the markets of Nigeria, Kenya, Zambia,
Botswana and also Namibia. Market universes formed in this manner seek to minimise the
difficulties of including extremely heterogeneous markets within the common integrated
market assumption.
One the three factors have been formed the three-factor CAPM can be restated as the
expected return on a risky portfolio p, in excess of the risk free rate E(Rp) Rf is a function of
(i) excess return on the market portfolio, Rm Rf ; (ii) the difference between the return on a
portfolio of small-size stocks and of large-size stocks, SMB; and (iii) the difference between
the return on a portfolio of high illiquidity stocks and of low illiquidity stocks, ILLIQ.
Therefore, the expected excess returns on a portfolio p of emerging market stocks can be
written as
( ) [ ]
E rpt r ft = p E (rmt ) r ft + si E (SMB) + hi (HML) (4)
The equilibrium relation of the Fama and French (1993) three factor model is stated
in terms of expected returns. In order to test the model with historical data, it is necessary to
transform (4) to the following estimating equation:
rit r ft = i + i ( rmt r ft ) + s i SMBt + hi HMLt + it (5)
where the variables are described above and p, t is an iid disturbance term.
4. RESULTS
(i). Summary statistics relating to size-liquidity sorted portfolios
11
The dispersion of stocks on a market by market basis between the nine size-illiquidity sorted
portfolios is given in Table 4. These have been generated for the markets of North Africa,
composed of Egypt, Morocco and Tunisia and South Africa, which includes the tiny
Namibian market. An additional Sub Saharan African market variable has been generated in
line with the few prevailing regional benchmarks that do exist, which while excluding South
Africa, includes Namibia, Botswana, Zambia, Kenya and Nigeria. There is an even
dispersion of stocks across all size-illiquidity sorted portfolios in South Africa, although the
very small number of Namibian stocks are all located in the small size, high illiquidity
portfolio. In the North Africa size-illiquidity portfolios there is a relatively even dispersion
although Egypt and Tunisia tend to dominate the larger size portfolios while Morocco and
Tunisia tend to dominate the more illiquid portfolio. The greatest dispersion occurs in the
Sub Saharan Africa case. Nigeria and Zambia dominate the large size portfolios while Kenya
and Botswana are concentrated in small to medium size portfolios. Notably Namibia, Zambia
and Botswana stocks are concentrated in the high illiquidity portfolios further underlying the
severe illiquidity present.
Table 4
Descriptive statistics for all nine size-illiquidity factor sorted portfolios, the mean industry
portfolios, and the zero-cost SMB and ILLIQ portfolios are in Tables 5, 6 and 7. Table 5
shows that the average mean returns increase considerably from large to small size stock
portfolios for the markets of South Africa and Sub Saharan Africa. This is also reflected in
the measure of volatility, where standard deviations increase dramatically from larger size
firm to smaller size firm portfolios. Average returns in small size stock portfolios tend to be
more risky than in larger stock portfolios, but also have higher potential returns. However the
negative value of the mean of the SMB in Table 6 for North Africa and Sub Saharan Africa
indicates the likelihood of a reverse size effect from that in Fama and French (1993) where
returns steadily decrease as stock size increases. Although there is little difference between
the low and high liquidity portfolio means across the various sample group market variables,
there is an increase in volatility from high illiquidity to low illiquidity stock portfolios. This
result is expected given that the often severe illiquidity inhibits the adjustment of prices and
returns in reaction to the impact of sudden erratic order flow on stock prices. The evidence in
Table 6 shows that there is little correlation between the SMB, ILLIQ and Market valuation
factors for the market variables of South Africa and Sub Saharan Africa. In contrast there is
some correlation between the illiquidity and market factors within the London, Paris and
North African markets. It should be noted that these differences do indicate that the implicit
assumption of integration on either an intra or inter market basis is tenuous at best. However
12
the lack of viable alternative methodologies and the ease of application merit the continued
use of this methodology in this study.
Tables 5, 6 and 7
Table 7 demonstrates the high degree of non-normality for the aggregate market, top
tier stocks and industrial sectors. Excess Kurtosis is particularly high for Nigeria (45.2449),
Zambia (41.4781) and Botswana (75.9508) while there is considerable contrast in the
standard deviation with values of over 15% recorded for Tunisian top tier stocks, Nigerian
Consumer non-cyclical, Energy and Overall segments, Botswana overall market, and the
Financial sector in Zambia. Interestingly South Africas top tier stocks have an exceptionally
high volatility (32.84%) which likely reflects the markets being deep enough to properly
reflect investor sentiment and uncertainty over the volatile macroeconomic climate
experienced during the sample time period. However the top tier stocks generally do show
considerable decreases in levels of skewness and kurtosis with returns showing more
normality in their distribution than for the overall market.
(ii) Performance of traditional CAPM against three-factor CAPM

Table 8 reports the results from the grouped pooled regression on all nine size-illiquidity
sorted portfolios for each of the market variables: North and South Africa and Sub Saharan
Africa. In the case of the South African market variables there is little increase in explanatory
power between the one factor CAPM and its three factor counterpart. This would indicate
both the presence of a considerable amount of intra-market integration and that the cross
section of stock returns is sufficiently explained by a single market premium as opposed to
additional size and liquidity factors. This would indicate that liquidity is a serious issue
within the French market. The additional factors in all three markets also act to further reduce
the statistical significance of the Jensen alpha, p, term in the case of regressions for small
size high illiquidity, medium size low illiquidity and large size medium illiquidity portfolios.
However the results for the North and Sub Saharan African market variables are markedly
different from their South African counterparts. In North Africa there are significant
increases in explanatory power arising from the addition of the size and liquidity factors and
generally the Jensen alpha, p, terms are not statistically different from zero indicating a good
fit with theory. However in the case of Sub Saharan Africa the levels of explanatory power
are frequently less than those of North Africa. The severity of illiquidity issues affecting the
model is highlighted in the adjusted R2 of 0.2% for the small size high illiquidity portfolio in
the one-factor model which leaps to 19.99% upon the inclusion of the size and liquidity
factors. A similar dramatic increase in explanatory power from the inclusion of the size and
liquidity factors arises in the large size high illiquidity portfolio where the adjusted R2 in the
13
one-factor model is 20.44% and increases to 94.09%. Although the application of this model
to highly illiquid markets is questionable and the implicit assumptions regarding inter and
intra asset market integration are very tenuous these are important results in the context of
emerging markets, as the vast majority of research on the original of Sharpe (1964) and
Lintner (1965) is confined to developed markets.
Table 8
In all cases within Africa the Jensen alpha, p, term was not statistically different
from zero which is in line with theory. The estimated coefficients on both the market excess
return ( ) and the illiquidity factor (HML) are large and significant in almost all cases.
Those on the size factor-mimicking portfolio (SMB) are smaller in the majority of cases and
are only significantly different from zero in the large or small-size company portfolios. The
coefficients on the large-size portfolios are negative as well as being highly statistically
significant. The negative sign on the large-size portfolio betas indicates that large firms
returns decrease when the size premium increases, which is the opposite for small firms. This
behaviour is not expected and is indicative of a reversal of the documented size effect that
effects the valuation of smaller firms (Martinez et al, 2005). It is also a feature of an
extremely heterogeneous universe of stocks, where there are considerable differences in
stocks within markets as evidenced from the descriptive statistics in Table 3. This is the
opposite of what would be expected and does not provide investors with good hedging
opportunities. Thus, as with the results for the small-size portfolios, a different valuation
method would be needed to price very high illiquidity stocks and firms accurately. The
estimated coefficients on the illiquidity factor-mimicking portfolios are negative for low and
medium-illiquidity portfolios indicating as expected that more liquid firms experience a
decrease in expected returns when aggregate market illiquidity increases. In general, the
coefficients on the low-illiquidity and medium-illiquidity portfolios are negative, as one
would expect, with firms paying lower returns when the illiquidity variable increases.
However, the coefficients on the high-illiquidity portfolios are positive indicating that these
companies pay higher returns when the illiquidity measure increases. The increased
explanatory power of these models illustrates that the augmented CAPM is appropriate for
illiquid markets.
(iii) Modelling country and industry portfolios and cost of equity estimation
Table 10 reports the cost of equity estimates calculated from the expected returns of each
country and industry regression. It should be noted that the estimates for each market are
given alongside the market universe from which they have been calculated. As such South
14
Africa is estimated from its own market universe, while Namibia has been uniquely estimated
from both South Africas universe as well as a Sub Saharan Africa universe. The latter
universe is made up from all Sub Saharan African markets within the sample group except
South Africa. Finally a North African universe has been used to account for the sub-regions
three markets. The high cost of equity for the African markets is used as the discount factor
and applied to future cash flows in project valuation. The cost of equity is calculated from the
annualised combination of the total risk premium, which is the sum of market, size and
illiquidity premiums, with the 1 month UK Treasury rate a proxy for the risk free rate.
Tables 9 and 10
Average Returns in North Africa

The inclusion of the additional size and liquidity factors, within the three-factor model, cause
increases in explanatory power in all cases. Interestingly in almost all cases across industries
in all three North African countries the coefficients on the size premium are small and
frequently not statistically significant, whereas in contrast those associated with the liquidity
premium are large and highly significant. This provides evidence that liquidity is an
important variable driving the returns process. However the effects of severe illiquidity, and
price-rigidity, affecting the ability of the regression model to capture the low level of activity
associated with highly illiquid time series can be seen in the case of the Tunisian consumer
non-cyclical industry. Adjusted R2 of the one-factor CAPM is less than 1% and rises to a
meagre 4.24% through the inclusion of the size and liquidity factors. Although this represents
a sizeable jump in absolute terms it does question the use of standard pricing models in
modelling highly illiquid series. In general the adjusted R2 terms indicate the model has
reasonable explanatory power across the North African markets. However despite the
apparent fit of the model there are some inconsistencies in the estimates of the cost of equity,
in Table 11. The levels of cost of equity for the aggregate market are in line with expectation.
The smaller but highly developed Tunisian market has the lowest value (22.51%), followed
by Morocco (33.78%) and finally Egypt (56.65%). However the cost of equity for the top tier
stocks for these markets is higher than that for the aggregate market. Egypt again has the
highest value (59.46%) followed this time by Tunisia (43.79%) and finally Morocco
(37.59%). There is also a considerable variation in the cost of equity between industries
within these markets with the blue-chip financial sector notably having higher cost of equity
than that of the overall market. The likely reason for the higher costs of equity amongst the
top tier stocks in contrast to overall market is the tenuous assumption of integration amongst
the sub-regions asset markets which is implicit in the formation of the market universe from
which the additional size and illiquidity valuation factors are drawn. The presence of
segmentation in the sub-region is likely owing to the markets of Morocco and Tunisia being
15
smaller and more developed than those in Egypt and more closely adhering to civil code law.
There are additional differences concerning the extent of stock market culture in amongst the
three countries.
Average Returns in the Sub Saharan African Markets

The inclusion of the additional size and liquidity factors causes increases in explanatory
power in both the overall and top tier stocks in all Sub Saharan regional markets. However
the greatest increases arise from the inclusion of the size factor in the overall markets of
Botswana (causing a jump from an adjusted R2 of 15.77% for CAPM to 90.77% for the three-
factor CAPM) and for Nigerian top stocks (causing a jump from 18.36% for CAPM to
33.13% for liquidity-augmented CAPM). Interestingly the greatest general difference in the
levels of explanatory power of models arises within Nigeria and Botswana where the general
levels of adjusted R2 for the top tier stocks is considerably lower than those for the overall
market. This provides some evidence of the considerable segmentation and skewed profile of
these markets between the often large and liquid blue chip stocks and the small and severely
illiquid remainder of market. In contrast to the evidence from the aggregate market the
profiles of the top tier stocks are quite different. Top tier stock returns across the sample
group appear to be better explained by the addition of the liquidity factor alone with the size
factor not being statistically significant. Namibia in contrast to the other Sub Saharan markets
has exceptionally low adjusted R2 terms with these jumping to a meagre 9.60% upon the
inclusion of size and liquidity factors. However despite the evidence regarding segmentation
within the Sub Saharan market universe that has been used the levels and differences in the
cost of equity are as would be intuitively expected. The aggregate Nigerian market has the
highest at 92.14% that drops to 51.21% for the top tier stocks. The markets of Botswana and
Zambia which have similarly size differences in intra-market illiquidity also have decreases in
costs of equity from the overall market to that of the top stocks. Botswana falls from an
aggregate value of 66.97% to 21.19%, and Zambia falls from 80.37% to 52.41%. The very
low levels of top stocks in the former is expected due to the presence of many blue chip South
African mining and finance companies having secondary listings in the Gabarone exchange.
These adhere to the very high regulatory and governance standards effective in neighbouring
Johannesburg. Finally the cost of equity for Namibia is estimated at 18.05% which is the
lowest in the sample universe. Although Namibia is entirely made up of local companies
with their primary listings in Windhoek they are heavily influenced through the integrated
market between Namibia and South Africa, and shared membership of the Common
Monetary Area, CMA.
Average Returns in South Africa and Namibia
16
The evidence from Table 9 regarding South Africa and Namibia, the latter which is also
included in the South African market universe by merit of the integrated trading link between
the two, shows there is significant segmentation. There is a general decrease in the levels of
the adjusted R2 between the overall South African market and top tier stocks as well as with
Namibia. Generally the explanatory power of the one-factor CAPM is sufficient with only
incremental increases in adjusted R2 for the inclusion of the size factor in South African top
stocks and liquidity factor in Namibia. The cost of equity in the aggregate South African
market is 50.26% and is 36.19% for the top ten stocks. Namibia has a value of 33.23%.
While these values are high Correia and Uliana (2004) present evidence of costs of equity on
a similar scale. These high values would also explain the recent migration of primary listings
from Johannesburg to London of firms such as Old Mutual and Anglo American that can
afford the higher fixed costs of adhering to more stringent regulatory and governance regime.
5. CONCLUSIONS
This study proposes a unique size and liquidity augmented capital asset pricing model to
explain the cross section of expected returns in the emerging market region of Africa which
has previously been largely excluded from empirical valuation model research. The markets
used include Morocco, Tunisia and Egypt in North Africa, Kenya, Botswana, Nigeria and
Zambia in Sub Saharan Africa and Namibia and South Africa. There are considerable
differences between markets in terms of corporate governance and regulation with the most
developed regimes being those of North and South Africa. Illiquidity series were constructed
on a time-series cross-section basis and augment the Fama and French (1993) risk-adjusted
CAPM which is used to form cost of equity estimates.
Costs of equity are found to be highest in Nigeria and Zambia followed by Kenya,
Morocco, Egypt and then Botswana, Namibia, South Africa and Tunisia. An interesting
finding is that the high profile financial sectors have higher costs of equity than that of the
overall aggregate market. These results do shed light on the depth and level of adherence to
regulations and on the quality of institutions within these markets as well as on the current
policy drive towards the integration of Africas securities markets. Consequently firms in
Nigeria and Zambia raising external capital domestically to fund industrial expansion are at a
distinct disadvantage to those in North Africa or Europe. Firms in Botswana and South
Africa also have similar problems although there are opportunities to benefit from improving
adherence to regulatory and governance standards thereby lowering their cost of equity to that
of the top tier bracket of stocks. Development policy should be focussed on the design of
effective regulation and appropriate enforcement mechanisms in order to make the smaller
Sub Saharan African markets more competitive venues for raising funds in contrast to the
larger and more active domestic banking sectors. Caution should be taken in the policy drive
17
towards integration through a more phased approach given the often considerable degree of
segmentation that currently exists within and between the continents markets.
Overall this study provides substantial evidence of the benefits of size and liquidity
factors augmenting the traditional CAPM in explaining the cross section of stock returns.
Furthermore given the severity of illiquidity found in the continents equity markets it is
essential that this phenomenon be accounted for within models used to estimate cost of
equity. The effects of omitting liquidity measurement are a potential source of serious
inaccuracy in modelling African equity markets. Overall the findings of this study provide
continued support for the risk-return paradigm in investment analysis.
18
REFERENCES
Amihud, Y. (2002) Illiquidity and stock returns: cross section and time series effects. Journal
of Financial Markets, 5, 31-56.
Bourse de Casablanca website (2009): Bourse de Casablanca, Morocco.
http://www.casablanca-bourse.com/ Accessed on 10 February 2009
Bourse de Tunis website (2009): Bourse de Casablanca, Morocco. http://www.bvmt.com.tn/
Accessed on 10 February 2009
CASE website (2009) http://www.egyptse.com/ Accessed on 10 February 2009
Collins, D. and Abrahamson, M. (2006) Measuring the cost of equity in African financial
markets, Emerging Markets Review, 7, 67-81
Correia, C. and Uliana, E. (2004) Market segmentation and the cost of equity of companies
listed on the Johannesburg Stock Exchange. South African Journal of Accounting
Research, 18(1), 65-86
Daniel, K. and Titman, S. (1997) Evidence on the characteristics of cross sectional variation
in stock returns. Journal of Finance, 52, 1-33
Fama, E. and French, K. (1993) Common risk factors in the returns on stocks and bonds.
Journal of Financial Economics, 33, 3-56.
Hearn, B. and Piesse, J. (2002). Equity Market Integration versus Segmentation in Three
Dominant Markets of the Southern African Customs Union: Cointegration and
Causality tests. Applied Economics, 34(14), 1711-1722
Hearn, B. and Piesse, J. (2009) Modelling size and illiquidity in West African equity markets.
Unpublished Working Paper: February 2009, Department of Management, Kings
College London
Hearn, B., Piesse, J. and Strange, R. (2009) Market Liquidity and Stock Size Premia in
Emerging Financial Markets: The Implications for Foreign Investment. International
Business Review, 16, forthcoming
Jefferis, K. (1995) The Botswana share market and its role in financial and economic
development, World Development, 23, 663-678.
JSE website (2009) http://www.jse.co.za/ Accessed on 10 February 2009
La Porta, R., Lopez-de-Silanes, F., and Shleifer, A. (2008) The Economic Consequences of
Legal Origins. Journal of Economic Literature, 46, 285-332
Lavelle, K. (2001) Architecture of Equity Markets: The Abidjan Regional Bourse,
International Organization, 55, 717-742.
Lesmond, D. A. (2005) Liquidity of emerging markets. Journal of Financial Economics, 77,
411-452.
Lintner, J. (1965) The valuation of risk assets and the selection of risky investments in stock
portfolios and capital budgets. Review of Economics and Statistics, 17, 13-37.
19
Liu, W. (2006) A Liquidity-augmented capital asset pricing model. Journal of Financial
Economics, 82, 631-671.
Martinez, M. A., Nieto, B., Rubio, G. and Tapia, M. (2005) Asset pricing and systematic
liquidity risk: An empirical investigation of the Spanish stock market. International
Review of Economics and Finance, 14, 81-103.
Nigerian Stock Exchange (2009) Nigerian Stock Exchange History, Available at
http://www.nigerianstockexchange.com/the_exchange.htm
OHara, M. (2003) Presidential address: liquidity and price discovery. Journal of Finance, 58,
1335-1354
Old Mutual (2009) http://www.oldmutual.com/ Accessed on 21 March 2009
Pastor, L. and Stambaugh, R. (2003) Liquidity risk and expected stock returns. Journal of
Political Economy, 111, 642-685.
Sharpe, W. F. (1964) Capital asset prices: A theory of market equilibrium under conditions of
risk. Journal of Finance, 19, 425-442.
Shum, W. C., and Tang, G. Y. N. (2005) Common risk factors in returns in Asian emerging
stock markets. International Business Review, 14, 695-717.
South African Institute of Directors (2009) King II corporate governance report.
http://www.iodsa.co.za/king.asp Accessed 10 February 2009
Stoll, H. R. (2000) Friction, Journal of Finance, 55, 1480-1514.
Zribi, H. (2008) Interview with Hatem Zribi, Market Development, Bourse de Tunis, Tunisia.
18 January 2008.
20
Table 1 Market Capitalisation and Turnover profiles, 2008
Europe North Africa West Africa East Africa Southern Africa
London Egypt Tunisia Morocco* Nigeria Kenya South Africa Namibia Zambia Botswana
Listed Firms 2,210 302 53 78 234 46 373 8 24 20
Proportion market capitalisation to total (%)
Top 1 7.72 7.43 12.51 27.55 8.40 21.02 8.31 55.55 18.12 22.29
Top 5 30.35 29.64 43.56 57.81 27.08 63.67 30.36 99.12 73.22 77.65
Top 10 46.12 43.58 65.23 74.29 44.38 78.79 45.44 100.00 96.20 92.87
Top 20 60.95 59.69 88.20 88.88 64.33 94.31 62.31 -- -- 100.00 100.00
Proportion Turnover value to total (%)
Top 1 -- -- 11.50 9.69 19.42 9.00 20.44 12.74 46.77 32.85 18.52
Top 5 -- -- 36.81 38.19 58.92 36.45 56.73 42.19 100.00 92.49 68.53
Top 10 -- -- 55.31 61.98 78.00 52.66 74.76 59.67 100.00 98.71 94.55
Top 20 -- -- 78.67 86.51 92.01 69.59 95.78 76.28 -- -- 100.00 100.00
Sector Concentration by Market Capitalization
Financials 17.80 24.72 57.38 42.04 59.74 46.90 28.11 70.45 18.25 85.33
Comm. 9.74 18.22 0.31 27.55 1.37 0.96 14.09 -- -- 18.12 -- --
Basic Materials (Mining etc) 11.98 14.63 3.89 3.37 0.53 1.63 23.86 -- -- -- -- -- --
Consumer cyclical 4.90 5.00 12.16 2.55 2.81 4.73 6.52 -- -- 1.22 3.04
Consumer non-cyclical 26.84 6.59 8.92 4.35 17.79 26.95 6.63 21.12 37.93 8.84
Diversified 0.37 1.57 12.51 7.39 1.57 0.08 4.27 8.42 -- -- -- --
Energy 19.08 1.03 0.38 1.46 10.41 4.41 9.50 -- -- 3.43 2.65
Industrial 4.21 18.86 4.45 9.93 5.35 14.33 5.58 -- -- 15.48 0.07
Technology 1.13 0.12 -- -- 0.14 0.02 -- -- 0.31 -- -- -- -- 0.05
Utilities 3.96 0.18 -- -- 1.23 -- -- -- -- 0.00 -- -- 5.53 -- --
Source: Compiled by authors from Bloomberg
Notes: (1) * Refers to Central Market and Block Trading Market
(2) Refers to entire market including Main and AIMS for London
21
Table 2 Contrast of market regulations and commissions
Commercial No. Brokers Market Clearance Procedures Capital Trading Hours Trading Arrangements
Law Gains Tax
London Common law 1570 G30 Exempt 8-30am 16-30pm Electronic Shares Electronically Traded
(SETS) platform operating as continuous
order matching auction.
South Africa Common law 101 Fully G30 compliant Exempt 8-25 am 9-00 am: Pre-Opening JSE SETS Electronic Trading system (SETS
including custodial facilities. electronic call auction. trading system has been in place at the
DVP undertaken T + 3 London Stock Exchange and replaced the
9-00 am 4-00 pm: Continuous
former JET system in 2002)
Namibia Common law 6 Trading.
4-00 pm 6-00 pm: Run-Off
Kenya Common law 18 Partial G30 compliant. DVP Exempt 10-00am 12-00noon Automated Trading system previously
undertaken T + 3. Open Outcry commenced by sounding a bell
Egypt Civil code 146 Fully G30 compliant Exempt Listed Securities Market (On the Electronic order matching system for Cairo
including custodial facilities. Exchange): 11-30am 15-30pm and Alexandria Stock Exchanges (CASE)
DVP undertaken T + 3. The CASE Trading System, or CTS
Morocco Civil code 15 Exempt Electronic order matching system
Tunisia Civil code 24 Exempt 9-00am to 10-00am: Pre- Electronic order matching system
opening// 10-00am 11-30am
Trading Session
BRVM Civil code 20 Partial adherence to G30 Exempt Pre-opening call auction Electronic order matching system
standards. Custodial facilities followed by continuous trading
provided by local and from 10-00am to 10-30am
Ghana Common law 16 international brokers Exempt 10-00am to 11-00am Continuous auction on trading floor
Nigeria Common law 219 Custodial facilities provided Exempt 11-00am to 13-00pm Call Over trading system was replaced in
by brokers with sufficient April 1999 by Automated Trading System
capitalisation. Mostly G30 (ATS) which serves as an electronic order
compliant and DVP matching system
undertaken at T + 3
Mauritius Civil code 11 Partial G30 compliant. DVP Exempt 9-00am 11-30am Automated Trading system
Zambia Common law 3 undertaken T + 3. Exempt 9-00am to 10-00am: Pre- Automated Trading system
opening// 10-00am 13-00pm
Trading Session
Botswana Common law 4 Exempt 10-00am 12-00pm Call auction conducted on physical trading
floor
Notes: (1) South Africa and Namibia adhere to Roman-Dutch civil code but commercial and securities regulatory law follows English common law
22
Table 3 Summary Statistics
Local market UK equivalent
Country Start No. Firms by Zero Return Price Volume Market Price Market Bid-Ask spread
trading activity (%) (thousands) Capitalization Capitalization (%)
(millions) (millions)
North Africa
Egypt 1998 Financial 48.09 26.22 8044.67 1,026.78 2.75 99.77 0.0414
[50.55] [23.58] [4534.04] [322.50] [2.74] [38.10] [0.0290]
Basic Material 46.96 56.37 3345.33 239.66 5.52 23.59 0.0259
[52.17] [21.45] [2711.79] [101.02] [2.75] [11.43] [0.0226]
Consumer non- 54.64 93.74 399.76 88.48 11.11 9.51 0.1395
cyclical [57.14] [123.34] [234.89] [63.93] [10.74] [8.85] [0.1476]
Industrial 46.07 26.26 2034.54 382.92 2.51 37.78 0.0453
[45.94] [18.46] [1159.02] [180.55] [1.85] [19.91] [0.0489]
Top 10 21.08 91.39 13,247.49 832.02 9.07 82.33 0.0077
[21.21] [33.45] [12,518.37] [357.63] [4.74] [51.09] [0.0074]
121 50.92 42.05 6,027.75 1,535.97 4.31 162.45 0.0562
[53.24] [44.83] [4,760.21] [789.51] [4.86] [117.44] [0.0606]
Morocco 1993 Financial 65.00 449.98 2,795.61 3,613.09 28.87 241.15 0.0083
[65.73] [393.11] [1361.85] [2,444.36] [24.67] [163.96] [0.0008]
Consumer 72.45 106.88 2,185.28 759.67 6.84 49.03 0.0079
cyclical [82.61] [83.25] [434.65] [473.73] [5.15] [29.58] [0.0004]
Diversified 52.10 783.13 287.65 8,906.95 50.38 569.83 0.0103
[48.33] [733.94] [108.00] [9,134.44] [45.67] [557.31] [0.0000]
Industrial 68.42 594.01 57.69 5,647.75 38.25 360.83 0.0080
[66.66] [525.20] [17.10] [5,618.73] [32.88] [349.10] [0.0000]
Top 10 43.82 663.27 4,568.47 12,228.62 42.63 785.21 0.0017
[39.55] [636.16] [1,507.30] [8,519.74] [40.36] [528.93] [0.0000]
40 66.43 616.07 7,071.77 4,045.14 39.62 263.65 0.0054
[66.67] [635.06] [5,205.65] [3,077.26] [39.75] [200.44] [0.0000]
Tunisia 1991 Financial 59.45 25.82 729.80 130.50 14.29 72.44 0.0208
[60.35] [22.63] [593.82] [107.61] [11.67] [57.28] [0.0199]
Consumer 60.98 16.44 224.79 46.57 8.63 32.05 0.0370
cyclical [59.09] [13.55] [93.57] [40.30] [6.97] [21.41] [0.0242]
Consumer non- 72.33 43.23 59.08 104.78 24.56 50.89 0.0285
cyclical [69.69] [41.16] [27.07] [76.46] [21.68] [48.39] [0.0199]
Top 5 50.82 25.40 324.47 254.76 46.26 131.49 0.0640
[49.09] [21.65] [222.34] [264.31] [41.48] [122.81] [0.0643]
37 64.97 34.65 1,084.96 58.59 18.93 103.70 0.5337
[66.04] [32.02] [835.74] [48.28] [16.02] [95.10] [0.6913]
23
West Africa
Nigeria 2002 Financial 53.61 32.45 2,032,900.25 53,641.83 0.13 300.68 -- --
[58.55] [39.13] [1,054,456.35] [27,970.54] [0.16] [141.32]
Consumer non- 57.94 17.03 182,111.90 1,956.04 0.07 8.36 -- --
cyclical [60.17] [16.41] [122,372.26] [2,112.87] [0.06] [8.64]
Energy 41.35 82.58 36,095.08 32,299.59 0.36 138.49 -- --
[39.67] [79.76] [24,145.01] [34,046.92] [0.32] [137.45]
Top 10 41.96 12.04 1,537,138.03 123,079.19 0.05 540.25 -- --
[43.18] [7.24] [920,356.09] [51,593.87] [0.02] [214.07]
129 63.67 18.76 2,631,207.67 30,129.70 0.08 132.49 -- --
[66.94] [18.44] [1,373,235.44] [25,008.37] [0.07] [102.05]
East Africa
Kenya 1995 Financial 47.84 29.67 116,329.73 5,249.66 0.24 41.05 0.0408
[49.65] [17.99] [35,845.90] [19,340.63] [0.19] [148.60] [0.0403]
Consumer non- 69.28 74.88 32,676.73 3,368.45 0.65 29.18 0.0296
cyclical [70.56] [76.21] [9,836.90] [12,164.60] [0.60] [151.82] [0.0283]
Industrial 70.55 33.41 6,017.40 5,446.07 0.28 39.46 0.0307
[72.85] [30.25] [1,590.00] [25,108.37] [0.24] [227.83] [0.027]
Top 5 39.76 39.08 91,439.09 -- -- 0.38 154.17 0.0292
[40.00] [14.86] [28,159.00] [0.18] [446.72] [0.0324]
37 60.31 45.01 174,106.53 3,582.61 0.38 31.88 0.0350
[61.63] [41.10] [59,870.70] [16,327.59] [0.36] [145.32] [0.0362]
Southern Africa
South Africa 2000 Financial 48.42 1,717.81 615,956.42 714,336.90 1.52 548.30 -- --
[47.93] [1,627.15] [622,400.30] [5,467,097.31] [1.54] [4,672.59]
Communication 41.17 1,801.78 103,311.43 1,240,306.64 1.55 931.35 -- --
[39.92] [1,315.63] [78,310.76] [7,513,715.89] [1.52] [6,494.58]
Basic Material 39.49 4,367.54 268,319.65 1,706,137.77 3.46 1,281.98 -- --
[41.88] [3,671.98] [200,649.96] [13,536,731.66] [3.01] [10,420.37]
Consumer 44.69 1,628.92 279,201.93 466,612.01 1.39 356.69 -- --
cyclical [44.28] [1,300.37] [174,665.35] [3,142,816.10] [1.28] [2,662.86]
Consumer non- 45.45 985.29 246,512.39 255,289.09 0.86 193.51 -- --
cyclical [45.45] [796.64] [247,604.33] [1,827,363.15] [0.79] [1,539.38]
Energy 43.88 4,130.46 42,129.91 3,121,798.49 3.31 2,340.72 -- --
[44.44] [2,636.55] [41,485.32] [20,758,811.13] [2.26] [17,555.67]
Industrial 46.81 1,180.60 168,019.15 305,975.59 1.00 232.80 -- --
[45.65] [907.97] [143,755.51] [2,217,807.39] [0.86] [1,921.39]
24
South Africa (continued)
Top 10 9.35 10,875.53 436,124.70 7,159,093.22 8.66 5,420.18 0.0040
[8.09] [8,845.80] [442,050.81] [50,766,503.99] [6.82] [43,196.07] [0.0060]
273 45.44 1,832.36 1,846,339.16 698,166.17 1.56 529.35 0.1007
[45.11] [1,375.33] [1,635,892.97] [4,991,884.70] [1.41] [4,215.62] [0.1038]
Namibia* 1995 Financial 92.96 13.86 725.99 207.70 0.87 19.71 -- --
[93.8] [1.58] [189.1] [156.5] [0.17] [15.99]
7 92.53 8.28 1,658.26 206.66 0.59 18.35 -- --
[93.48] [1.65] [746.24] [147.90] [0.17] [14.55]
Botswana 1996 89.43 224.09 9427.84 50,208.04 21.93 4664.87 -- --
Financial
[90.00] [150.65] [6,400.21] [31,531.52] [16.59] [3331.14]
Consumer non- 89.40 630.00 1,293.33 51,656.72 67.11 5,345.24 -- --
cyclical [90.48] [671.11] [569.17] [41,913.88] [73.37] [4,316.3]
86.13 335.13 5,297.94 14,133.67 32.04 151,475.21 -- --
Top 3
[87.30] [211.32] [2,634.31] [11,133.75] [22.37] [97,449.5]
90.49 291.48 11,106.26 37,295.78 29.55 3,530.67 -- --
19
[91.15] [216.36] [7,466.05] [23,959.62] [23.29] [2,532.89]
Zambia 1997 91.74 2,182.70 27,515.11 215,983.31 0.38 32.39 -- --
Financial
[92.86] [1,777.02] [427.6] [101,942.25] [0.25] [17.63]
Consumer non- 86.02 926.08 4,439.44 245,914.59 0.13 34.17 -- --
cyclical [87.27] [238.55] [1,244.82] [62,472.12] [0.03] [7.87]
83.87 877.18 1,892.49 119,399.79 0.12 16.60 -- --
Industrial
[84.42] [330.62] [78.87] [22,125.33] [0.06] [3.95]
79.44 116.50 6,231.29 415,446.40 0.02 58.70 -- --
Top 3
[80.95] [39.66] [1,159.1] [119,251.55] [0.01] [15.60]
89.75 981.18 37,883.91 157,404.07 0.16 22.53 -- --
18
[90.91] [636.55] [4,123.63] [48,538.56] [0.14] [6.61]
Source: Compiled by authors from Bloomberg, Datastream and National stock exchanges
Notes: (1) * Indicates Namibian domestic market of 7 locally listed firms. Remaining 22 Namibian firms have primary listings in South Africa and are considered South African
25
Table 4 Average number of stocks in each of the 9 size-illiquidity portfolios sorted by nationality by year in period: 2002-2008
Portfolio S/L S/M S/H M/L M/M M/H B/L B/M B/H
Market: North Africa
Egypt 10.29 6.00 9.00 14.00 8.43 3.00 7.00 2.00 3.00
Morocco 0.93 2.00 3.14 0.00 2.98 6.86 3.00 5.92 6.86
Tunisia 2.00 4.00 1.00 1.00 3.00 6.00 5.00 6.00 4.00
Overall Mean: 13.21 12.00 13.14 15.00 14.40 15.86 15.00 13.92 13.86
Market: Sub Saharan Africa (Excl. RSA)

West Africa
Nigeria 0.00 0.00 0.00 4.72 0.79 0.00 10.82 5.79 0.00
East Africa
Kenya 10.00 7.00 7.92 8.53 6.00 4.89 0.93 0.99 0.00
Southern Africa
Namibia 0.00 0.00 2.00 0.00 0.00 2.87 0.00 0.00 0.00
Zambia 0.00 0.00 0.00 0.00 0.00 0.00 0.00 5.92 8.17
Botswana 0.00 3.73 0.86 0.00 4.00 2.77 0.00 0.00 0.00
Overall Mean: 10.00 10.73 10.78 13.26 10.79 10.52 11.76 12.70 8.17
Market: South Africa

South Africa 12.70 14.27 9.19 17.68 14.07 14.27 16.86 13.00 14.71
Namibia 0.00 0.00 4.74 0.00 0.00 0.00 0.00 0.00 0.00
Overall Mean: 12.70 14.27 13.93 17.68 14.07 14.27 16.86 13.00 14.71
26
Table 5 Summary statistics for equally weighted monthly excess returns on 9 portfolios formed on size and illiquidity for period 2002 to 2008
Panel A: Summary Statistics for portfolios
North Africa
Mean 0.0200 0.0171 0.0012 0.0227 0.0192 0.0116 0.0205 0.0258 0.0095
Std. Dev. 0.0752 0.0520 0.0355 0.0911 0.0520 0.0378 0.0546 0.0522 0.0355
Skewness 0.3693 0.0929 0.6626 0.8201 0.4306 0.2237 -0.4099 0.3817 -0.6351
Excess Kurtosis 3.5889 2.6394 4.3447 4.9198 4.1632 3.4270 4.5507 2.8852 4.9243
Sub Saharan Africa
Mean 0.0414 0.0508 0.0078 0.0292 0.0554 0.0248 0.0259 0.0232 0.0548
Std. Dev. 0.1098 0.1294 0.0566 0.0906 0.1645 0.0507 0.0711 0.0756 0.3084
Skewness 1.0623 4.2679 1.8479 0.1375 5.1734 0.4022 -0.0279 1.7870 8.0741
Excess Kurtosis 4.1811 28.4699 7.9806 3.5922 37.7099 5.3684 4.4232 13.2611 70.4814
South Africa
Mean 0.0322 0.0378 0.0345 0.0207 0.0214 0.0220 0.0181 0.0176 0.0197
Std. Dev. 0.0909 0.0835 0.0812 0.0823 0.0811 0.0749 0.0804 0.0785 0.0755
Skewness -0.4408 -0.4169 0.3547 -0.4230 -0.4548 -0.6059 -0.2822 -0.6786 -0.7359
Excess Kurtosis 3.1252 2.9430 3.3875 3.4607 3.3583 3.4804 2.8291 3.5500 4.0560
Notes: (1) Values in parentheses are standard deviations
(2) *Indicates ranking by market capitalization
27
Table 6 Summary Statistics for valuation Factors
SMB ILLIQ MARKET
Panel A: Summary Statistics for valuation Factors
Mean -0.0211 -0.0445 0.0167
Standard Deviation 0.1098 0.1698 0.0389
Skewness 0.4079 -0.2049 -0.1117
Excess Kurtosis 3.7403 4.3973 2.8843
Panel B: Correlations for valuation Factors
SMB 100.00% -- -- -- --
ILLIQ -1.16% 100.00% -- --
MARKET 0.32% -74.21% 100.00%
Market: Sub Saharan Africa (Ex. RSA)
Mean -0.0076 -0.0127 0.0330
Skewness -5.5310 5.0305 0.7647
Excess Kurtosis 44.9210 39.8079 4.1513
SMB 100.00% -- -- -- --
ILLIQ -74.90% 100.00% -- --
MARKET -22.88% 3.70% 100.00%
Mean 0.0455 0.0016 0.0246
Skewness 0.1365 -0.0327 -0.5899
Excess Kurtosis 3.2288 2.5781 3.3665
SMB 100.00% -- -- -- --
ILLIQ 53.04% 100.00% -- --
MARKET -1.64% -43.66% 100.00%
28
Table 7 Summary statistics for market and sector portfolios for period 2002 to 2008
Mean Std. Dev. Skewness Ex. Kurtosis
Egypt Financials 2.65% 8.24% 0.33755 3.48899
Basic Materials 2.49% 9.55% 0.85466 3.83929
Consumer non-cyclical 2.09% 7.65% 0.33206 3.85120
Industrial 1.64% 8.62% 1.64934 8.31421
Overall 2.08% 6.93% 0.2600 3.3762
Top 10 stocks 2.55% 7.86% 0.1703 2.8852
Morocco Financials 2.09% 5.72% 1.24000 5.27974

Consumer-cyclical 1.93% 7.75% 1.60258 10.65812
Diversified 2.01% 6.14% 0.53871 4.14614
Industrial 0.49% 3.66% -0.56901 3.80414
Overall 1.65% 4.05% 0.3932 3.3483
Top 10 stocks 1.73% 5.47% 0.2589 4.6015
Tunisia Financials 0.92% 3.70% 0.53404 3.96711

Consumer-cyclical 0.41% 5.90% 1.35555 10.09601
Overall 0.85% 3.29% 0.2366 2.8573
Top 5 stocks 3.02% 17.79% 2.2122 14.7836
Nigeria Financials 2.48% 8.56% 1.04028 4.72583

Energy 4.87% 17.14% 4.10170 26.43733
Overall 4.51% 15.01% 5.9236 45.2449
Top 10 stocks 2.76% 9.42% 2.0153 14.3929
Kenya Financials 3.50% 9.46% 0.49657 4.37555

Industrial 2.25% 7.17% 1.21806 8.73913
Overall 2.46% 6.59% 0.0082 4.3176
Top 5 stocks 3.55% 9.33% 0.5326 4.1285
Botswana Financials 1.19% 3.68% 0.06252 2.88754

Consumer non-cyclical 0.84% 6.16% -0.04113 5.33490
Overall 3.01% 17.68% 8.4828 75.9508
Top 3 stocks 1.71% 4.79% 0.2822 3.4078
29
Zambia Financials 3.37% 17.44% 5.56440 41.17151
Industrial 1.29% 6.26% 0.78607 4.97322
Overall 4.29% 14.86% 5.5268 41.4781
Top 3 stocks 3.38% 10.61% 0.2169 3.6035
Namibia Financials 1.23% 7.25% 1.2277 8.1515

Overall 1.18% 5.49% 1.0021 5.9648
South Africa Financials 1.66% 6.86% -0.60161 3.76219

Communications 2.15% 7.48% -0.20693 3.85019
Basic Materials 2.25% 8.47% -0.81663 5.89009
Consumer-cyclical 2.29% 8.21% -0.11950 3.85632
Consumer non-cyclical 2.35% 7.67% -0.22097 3.35957
Energy 1.82% 7.92% -0.30686 4.90187
Industrial 2.30% 8.03% -0.68429 4.14792
Overall 2.04% 6.87% -0.69750 4.01340
Top 10 stocks 4.11% 32.84% -1.40260 12.9620
30
Table 8 Time series regressions using equally weighted monthly contemporaneous market excess returns for 9 portfolios formed on size and
illiquidity for period: 2002 2008, for all sample markets.
Panel A: CAPM-adjusted performance
(%) -0.005357 0.007261 -0.006691 -0.011368 0.003170 -0.011368 0.002513 0.008166 0.002125
(-1.121955) (1.072672) (-1.397570) (-2.450916) (0.953132) (-2.450916) (0.446269) (2.570265) (0.571413)
1.518855 0.586657 0.474620 2.036753 0.961458 2.036753 1.075551 1.053191 0.440609
(12.51773) (4.003432) (5.804839) (12.74059) (10.72894) (12.74059) (7.920175) (12.93391) (4.172015)
Adj R2 (1) 0.612293 0.182664 0.260760 0.752895 0.511739 0.752895 0.582345 0.611325 0.223801
Panel B: Three-factor CAPM performance
0.001118 0.009803 -0.004581 -0.009234 0.002126 0.002046 -0.000104 0.004933 -0.002087
(0.315979) (1.811638) (-1.581358) (-2.543508) (0.582187) (0.682524) (-0.036364) (1.652357) (-0.797501)
0.878687 0.973908 0.876119 1.237580 1.124696 1.025753 0.740164 1.026916 0.958096
(7.022521) (6.699951) (8.325951) (9.584519) (7.302620) (9.313548) (6.656185) (9.027741) (9.398514)
s 0.215837 0.174452 0.156010 -0.011452 -0.026352 0.003521 -0.170701 -0.156339 -0.126254
(4.849181) (2.817659) (6.687980) (-0.352727) (-0.538480) (0.143744) (-6.791579) (-7.365774) (-7.208247)
h -0.196973 0.120007 0.124353 -0.246684 0.050307 0.169204 -0.103990 -0.008547 0.159360
(-4.661852) (3.368047) (5.231084) (-6.821006) (1.606492) (7.306569) (-3.020759) (-0.300523) (6.401405)
Adj R2 (4) 0.800498 0.371786 0.642183 0.845336 0.515516 0.482208 0.740885 0.714006 0.639418
Market: Sub Saharan Africa (Ex. RSA)
(%) -0.000715 0.013740 0.006174 0.004556 0.000316 0.016850 0.002712 0.001765 -0.034687
(-0.073753) (1.335257) (0.779577) (0.544876) (0.042018) (2.382983) (0.307967) (0.206438) (-0.962539)
1.276006 1.122668 0.049373 0.748387 1.669272 0.242007 0.701872 0.650704 2.712181
(3.798998) (2.197257) (0.416808) (2.667822) (3.389879) (1.975589) (3.437512) (5.289273) (1.506141)
Adj R2 (1) 0.366351 0.198623 0.002110 0.178842 0.276410 0.051539 0.260795 0.195303 0.204432
-0.004119 0.002548 0.003753 0.005466 -0.003227 0.015786 0.004898 0.003470 -0.009740
(-0.489184) (0.265792) (0.581182) (0.749288) (-0.416174) (2.183117) (0.764772) (0.414957) (-0.951697)
1.333105 1.604774 0.185967 0.632915 1.757997 0.303428 0.540174 0.561359 2.019556
(5.760819) (3.882856) (1.211281) (2.743658) (3.174275) (1.943525) (3.569078) (4.700453) (12.90324)
s 0.013589 0.327575 0.101915 -0.099932 0.042301 0.046128 -0.128888 -0.065187 -0.363061
(0.285151) (3.049722) (2.369682) (-2.970691) (0.385120) (1.227625) (-4.186684) (-1.670744) (-8.095684)
h -0.127705 0.175742 0.103430 -0.168608 -0.073617 0.048280 -0.171004 -0.058968 0.381206
(-3.161651) (2.188099) (3.096489) (-6.771060) (-0.979962) (1.466525) (-6.748064) (-2.138529) (10.84770)
Adj R2 (4) 0.599270 0.574991 0.199937 0.413493 0.324843 0.090401 0.631303 0.222439 0.940939
31
(%) 0.003676 0.012885 0.016021 -0.005443 -0.004251 -0.001543 -0.006209 -0.006983 -0.004061
(1.334491) (3.256731) (2.842431) (-2.075970) (-1.694244) (-0.762673) (-1.632636) (-2.119963) (-1.139232)
1.160061 1.011151 0.751925 1.063302 1.042981 0.957134 0.987363 0.997982 0.965970
(23.73298) (18.65753) (8.529100) (28.84466) (38.86560) (29.30259) (21.60029) (27.59741) (18.94589)
Adj R2 (1) 0.905008 0.814608 0.471337 0.928396 0.918960 0.907348 0.837661 0.899668 0.911144
-0.000501 0.005417 0.003673 -0.003517 -0.004286 -0.003478 0.002599 0.000229 0.002074
(-0.194377) (1.855964) (1.033003) (-1.510961) (-1.569795) (-1.510434) (0.810048) (0.161178) (0.885841)
1.038140 0.951525 1.024506 0.997669 1.014633 0.966500 0.969714 1.033298 1.012838
(26.45349) (26.09708) (13.19865) (24.48346) (34.59193) (22.22948) (14.05787) (46.59046) (28.75017)
s 0.165904 0.200576 0.106528 -0.002577 0.017972 0.036935 -0.183203 -0.180187 -0.163470
(5.707388) (4.808618) (2.710215) (-0.108355) (0.587760) (1.357102) (-5.406611) (-7.641755) (-7.608577)
h -0.236526 -0.121625 0.505016 -0.122750 -0.053969 0.015695 -0.023915 0.075096 0.095891
(-5.705973) (-2.084912) (8.391285) (-3.861121) (-1.460185) (0.405947) (-0.531614) (3.233003) (3.355642)
Adj R2 (4) 0.943697 0.870780 0.853280 0.942744 0.919007 0.910285 0.921530 0.957579 0.958687
Notes: (1) Numbers in parentheses are t-statistics.
(2) One month T-bill risk free rate for month t, which is taken as the one month UK Gilt rate in this case
32
Table 9 Pooled cross-section regression for equally weighted monthly excess returns on country portfolios with size and illiquidity for 1996 to 2007
Finance Comm. Basic Cons. Cons. non- Diversified Energy Ind. Overall Top stocks
Materials cyclical cyclical
Egypt Panel A: CAPM-adjusted performance
(%) -0.001685 -- -- -0.003477 -- -- -0.007480 -- -- -- -- -0.008891 -0.006386 0.002006
(-0.326517) (-0.428024) (-1.542450) (-1.393536) (-1.952620) (0.244230)
1.687686 -- -- 1.700284 -- -- 1.698116 -- -- -- -- 1.512279 1.637023 1.413918
(13.81220) (7.640930) (13.15170) (6.608192) (22.44147) (10.38534)
Adj R2 (1) 0.629970 -- -- 0.473421 -- -- 0.741273 -- -- -- -- 0.459048 0.845166 0.484860
0.000305 -- -- -0.005171 -- -- -0.005248 -- -- -- -- -0.007965 -0.004645 -0.001517
(0.052340) (-0.611941) (-1.093023) (-1.238104) (-1.580658) (-0.247993)
0.980568 -- -- 1.298734 -- -- 1.330540 -- -- -- -- 1.250153 1.243065 0.966928
(4.982735) (4.779963) (9.635005) (4.424883) (16.34126) (4.179440)
s -0.005322 -- -- -0.136355 -- -- 0.053797 -- -- -- -- 0.006927 0.026890 -0.229120
(-0.076931) (-1.773849) (1.067727) (0.136717) (1.046787) (-3.395450)
h -0.218256 -- -- -0.124314 -- -- -0.113296 -- -- -- -- -0.080882 -0.121513 -0.138598
(-4.580095) (-2.170953) (-4.703731) (-1.375751) (-6.845433) (-2.765612)
Adj R2 (4) 0.715009 -- -- 0.507892 -- -- 0.770801 -- -- -- -- 0.457468 0.884906 0.618674
Tunisia Panel A: CAPM-adjusted performance
(%) 0.003417 -- -- -- -- 0.002013 0.027350 -- -- -- -- -- -- 0.003901 0.015663
(0.788147) (0.312423) (1.822452) (1.061384) (0.718821)
0.346773 -- -- -- -- 0.122347 -0.016852 -- -- -- -- -- -- 0.280110 0.878316
(3.605328) (0.831910) (-0.050055) (2.969898) (2.001232)
Adj R2 (1) 0.122121 -- -- -- -- 0.006511 0.000031 -- -- -- -- -- -- 0.099505 0.025080
0.003183 -- -- -- -- 0.002155 0.030046 -- -- -- -- -- -- 0.004016 0.012110
(0.797111) (0.351561) (1.634921) (1.078010) (0.593187)
0.699672 -- -- -- -- 0.448221 0.618128 -- -- -- -- -- -- 0.609508 1.693721
(5.085337) (2.149726) (1.570825) (5.252576) (2.280538)
s 0.038557 -- -- -- -- 0.052452 0.216512 -- -- -- -- -- -- 0.051697 -0.053284
(1.227955) (0.967307) (1.647819) (1.741449) (-0.346353)
h 0.109025 -- -- -- -- 0.100723 0.196583 -- -- -- -- -- -- 0.101808 0.251512
(3.330216) (2.508690) (2.182827) (4.065526) (1.720184)
Adj R2 (4) 0.229212 -- -- -- -- 0.017826 0.042464 -- -- -- -- -- -- 0.235879 0.063919
33
Morocco Panel A: CAPM-adjusted performance
(%) 0.007935 -- -- -- -- 0.005419 -- -- 0.011974 -- -- -0.002216 0.007793 0.008256
(1.525441) (0.892643) (1.883324) (-0.538788) (1.843883) (1.320715)
0.774197 -- -- -- -- 0.828358 -- -- 0.488735 -- -- 0.427887 0.529028 0.549679
(6.474034) (4.973298) (3.308405) (3.993308) (6.065120) (3.781425)
Adj R2 (1) 0.267871 -- -- -- -- 0.162832 -- -- 0.084908 -- -- 0.197177 0.250106 0.143214
0.004821 -- -- -- -- 0.002883 -- -- 0.008394 -- -- -0.005035 0.004582 0.002990
(1.052760) (0.442887) (1.538215) (-1.195357) (1.308474) (0.584139)
1.188697 -- -- -- -- 1.374372 -- -- 0.732952 -- -- 0.727560 0.924712 0.875449
(7.008840) (3.211436) (3.441543) (5.837561) (7.569275) (5.692381)
s -0.088846 -- -- -- -- -0.043079 -- -- -0.134780 -- -- -0.091059 -0.096045 -0.202921
(-2.061597) (-0.663877) (-3.257026) (-3.428849) (-2.990282) (-4.542797)
h 0.127680 -- -- -- -- 0.168398 -- -- 0.074996 -- -- 0.092234 0.121852 0.099975
(3.505862) (1.939771) (1.713795) (2.734372) (4.401306) (2.863435)
Adj R2 (4) 0.347810 -- -- -- -- 0.209712 -- -- 0.143377 -- -- 0.342208 0.426713 0.342343
Market: Sub Saharan Africa (Excl. RSA)
Nigeria Panel A: CAPM-adjusted performance
(%) -0.011025 -- -- -- -- -- -- -0.015198 -- -- 0.011014 -- -- -0.010115 0.001787
(-1.561881) (-1.279094) (0.598677) (-1.493109) (0.176588)
1.085628 -- -- -- -- -- -- 1.575194 -- -- 1.140987 -- -- 1.236906 0.786516
(4.351651) (2.448270) (3.229871) (4.111263) (4.443399)
Adj R2 (1) 0.438482 -- -- -- -- -- -- 0.245069 -- -- 0.111884 -- -- 0.505223 0.183603
-0.012949 -- -- -- -- -- -- -0.023206 -- -- 0.013947 -- -- -0.012742 0.005173
(-2.326012) (-1.417418) (0.663718) (-1.955144) (0.566575)
1.114878 -- -- -- -- -- -- 1.905948 -- -- 0.984794 -- -- 1.305426 0.594985
(7.542435) (2.461334) (2.802879) (4.915919) (4.054655)
s 0.004767 -- -- -- -- -- -- 0.220745 -- -- -0.114531 -- -- 0.033991 -0.143005
(0.207385) (1.067176) (-1.442264) (0.562602) (-3.015966)
h -0.078350 -- -- -- -- -- -- 0.097059 -- -- -0.106448 -- -- -0.049059 -0.145621
(-4.114879) (0.641922) (-1.858204) (-1.188374) (-4.741001)
Adj R2 (4) 0.569036 -- -- -- -- -- -- 0.349837 -- -- 0.118790 -- -- 0.602940 0.331334
34
Kenya Panel A: CAPM-adjusted performance
(%) 0.011088 -- -- -- -- -- -- -0.000843 -- -- -- -- 0.014065 0.007218 0.015126
(1.218777) (-0.116322) (1.542343) (1.097664) (1.397576)
0.723907 -- -- -- -- -- -- 0.454328 -- -- -- -- 0.255699 0.530633 0.620076
(2.725798) (2.376512) (1.116761) (2.416987) (2.116542)
Adj R2 (1) 0.151872 -- -- -- -- -- -- 0.120659 -- -- -- -- 0.023477 0.169120 0.111242
0.010199 -- -- -- -- -- -- -0.002992 -- -- -- -- 0.012276 0.005911 0.014490
(1.371975) (-0.467445) (1.602967) (1.093868) (1.550757)
0.686213 -- -- -- -- -- -- 0.513448 -- -- -- -- 0.313174 0.538367 0.572344
(3.219038) (2.375689) (1.282642) (2.485795) (2.568792)
s -0.047011 -- -- -- -- -- -- 0.030744 -- -- -- -- 0.033545 -0.008416 -0.053596
(-0.870277) (0.748800) (0.552273) (-0.206401) (-1.157876)
h -0.139818 -- -- -- -- -- -- -0.033985 -- -- -- -- -0.011494 -0.077726 -0.142091
(-3.614063) (-1.167523) (-0.230723) (-2.880168) (-3.795125)
Adj R2 (4) -- -- -- -- -- -- 0.224023 -- -- -- -- 0.049811 0.336955 0.305236
Botswana Panel A: CAPM-adjusted performance
(%) 0.006759 -- -- -- -- -- -- 0.008359 -- -- -- -- -- -- -0.015192 0.014115
(1.727464) (1.009270) (-0.733731) (2.572638)
0.157042 -- -- -- -- -- -- 1.15E-05 -- -- -- -- -- -- 1.376837 0.095197
(1.575717) (0.000113) (1.263647) (0.678491)
Adj R2 (1) 0.038879 -- -- -- -- -- -- 0.000000 -- -- -- -- -- -- 0.157780 0.010954
0.006838 -- -- -- -- -- -- 0.009140 -- -- -- -- -- -- -0.000919 0.013611
(1.733958) (1.080124) (-0.163815) (2.207532)
0.155334 -- -- -- -- -- -- -0.025705 -- -- -- -- -- -- 0.984593 0.132428
(1.393901) (-0.193535) (5.039308) (0.818072)
s -0.000679 -- -- -- -- -- -- -0.015249 -- -- -- -- -- -- -0.203849 0.029669
(-0.041732) (-0.418230) (-6.422976) (0.802990)
h 0.002216 -- -- -- -- -- -- 0.003736 -- -- -- -- -- -- 0.226236 0.039332
(0.127833) (0.124063) (9.616641) (1.334691)
Adj R2 (4) 0.015721 -- -- -- -- -- -- 0.011853 -- -- -- -- -- -- 0.907797 0.019289
35
Zambia Panel A: CAPM-adjusted performance
(%) -0.004440 -- -- -- -- -- -- 0.037669 -- -- -- -- 0.008614 0.009975 0.012619
(-0.365773) (2.575113) (0.944973) (1.223069) (0.869269)
1.155917 -- -- -- -- -- -- 0.372387 -- -- -- -- 0.130123 1.002832 0.644541
(1.735876) (1.675764) (0.957379) (1.824365) (2.992261)
Adj R2 (1) 0.110867 -- -- -- -- -- -- 0.032617 -- -- -- -- 0.011950 0.115746 0.091573
-0.006204 -- -- -- -- -- -- 0.034877 -- -- -- -- 0.007760 0.005174 0.010643
(-0.545754) (2.251142) (0.828668) (0.511784) (0.689371)
1.246548 -- -- -- -- -- -- 0.523246 -- -- -- -- 0.192984 1.235392 0.775817
(1.928779) (1.955792) (1.222715) (1.800872) (3.106179)
s 0.065702 -- -- -- -- -- -- 0.111115 -- -- -- -- 0.050052 0.165267 0.102190
(0.906270) (1.860687) (1.560898) (1.462527) (1.497021)
h 0.057317 -- -- -- -- -- -- 0.105729 -- -- -- -- 0.066164 0.127489 0.124405
(0.879044) (2.141581) (2.372374) (1.582224) (2.125012)
Adj R2 (4) 0.097396 -- -- -- -- -- -- 0.103669 -- -- -- -- 0.049909 0.165576 0.160813
Namibia Panel A: CAPM-adjusted performance
(%) -0.011025 -- -- -- -- -- -- -- -- -- -- -- -- -- -- 0.011694 -- --
(-1.561881) (1.636390)
1.085628 -- -- -- -- -- -- -- -- -- -- -- -- -- -- 0.007030 -- --
(4.351651) (0.081486)
Adj R2 (1) 0.438482 -- -- -- -- -- -- -- -- -- -- -- -- -- -- 0.000045 -- --
-0.012949 -- -- -- -- -- -- -- -- -- -- -- -- -- -- 0.010498 -- --
(-2.326012) (1.509327)
1.114878 -- -- -- -- -- -- -- -- -- -- -- -- -- -- 0.082365 -- --
(7.542435) (0.783318)
s 0.004767 -- -- -- -- -- -- -- -- -- -- -- -- -- -- 0.057898 -- --
(0.207385) (2.245792)
h -0.078350 -- -- -- -- -- -- -- -- -- -- -- -- -- -- 0.066999 -- --
(-4.114879) (2.894029)
Adj R2 (4) 0.569036 -- -- -- -- -- -- -- -- -- -- -- -- -- -- 0.096024 -- --
36
Namibia Panel A: CAPM-adjusted performance
(%) -0.000678 -- -- -- -- -- -- -- -- -- -- -- -- -- -- 0.001509 -- --
(-0.112024) (0.328741)
0.524997 -- -- -- -- -- -- -- -- -- -- -- -- -- -- 0.422898 -- --
(5.557361) (6.582796)
Adj R2 (1) 0.283619 -- -- -- -- -- -- -- -- -- -- -- -- -- -- 0.322107 -- --
-0.003468 -- -- -- -- -- -- -- -- -- -- -- -- -- -- 0.000226 -- --
(-0.582508) (0.047487)
0.607006 -- -- -- -- -- -- -- -- -- -- -- -- -- -- 0.480185 -- --
(4.911828) (5.516145)
s 0.011686 -- -- -- -- -- -- -- -- -- -- -- -- -- -- -0.006478 -- --
(0.194397) (-0.143960)
h 0.152955 -- -- -- -- -- -- -- -- -- -- -- -- -- -- 0.107574 -- --
(1.422521) (1.343598)
Adj R2 (4) 0.301370 -- -- -- -- -- -- -- -- -- -- -- -- -- -- 0.329449 -- --
South Panel A: CAPM-adjusted performance
Africa
(%) -0.004961 -0.001311 0.001874 -0.002841 -0.000758 -- -- 0.004208 -0.002238 -0.002092 -0.009822
(-2.145931) (-0.386496) (0.202691) (-0.678119) (-0.293026) (0.517482) (-0.873174) (-2.922150) (-0.215675)
0.874496 0.925452 0.838350 1.043936 0.985754 -- -- 0.568254 1.022904 0.917989 2.071980
(24.78025) (20.87673) (6.592773) (23.55260) (27.86770) (4.545977) (31.94610) (39.78223) (2.673539)
Adj R2 (1) 0.903383 0.850957 0.539490 0.899619 0.918058 -- -- 0.278286 0.901676 0.991180 0.212135
-0.004697 -0.001538 0.010522 -0.003836 -0.000601 -- -- 0.013311 -0.006385 -0.001496 0.027636
(-1.827607) (-0.400113) (1.305242) (-0.943101) (-0.212059) (2.022595) (-2.342008) (-2.093187) (0.830919)
0.823133 0.915742 0.963816 0.992251 0.983418 -- -- 0.691073 1.071175 0.925156 2.077156
(24.55439) (18.46375) (8.080686) (17.64654) (20.76726) (5.690078) (28.19935) (37.69932) (2.429765)
s 0.025348 0.010878 -0.266468 0.053255 -0.002039 -- -- -0.274880 0.062023 -0.017465 -0.827785
(1.252108) (0.293072) (-4.122870) (1.877703) (-0.067401) (-4.140084) (2.593574) (-1.680766) (-1.449338)
h -0.097424 -0.018721 0.248174 -0.099417 -0.004271 -- -- 0.243636 0.087283 0.014290 0.050932
(-2.756711) (-0.389211) (2.519829) (-2.092919) (-0.088407) (2.017392) (2.300516) (1.140187) (0.104363)
Adj R2 (4) 0.910852 0.847555 0.628107 0.904350 0.916059 -- -- 0.381974 0.926652 0.991610 0.284786
Notes: (1) One month T-bill risk free rate for month t, which is taken as the one month UK Gilt rate in this case.
(2) Numbers in parentheses are Newey-West HAC covariance adjusted t-statistics.
37
Table 10 Cost of Equity estimates derived from multi-factor regression (original)
Market North Africa Sub Saharan Africa (Excl. RSA) South Africa
Country Egypt Tunisia Morocco Nigeria Kenya Zambia Botswana Namibia Namibia South Africa
Finance 57.74% 24.64% 40.19% 80.17% 55.13% 84.57% 23.29% 80.07% 39.65% 48.98%
Communications -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- 52.02%
Basic Materials 64.98% -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- 33.71%
Consumer cyclical -- -- 18.72% 40.72% -- -- -- -- -- -- -- -- -- -- -- -- 58.65%
Consumer non-cyclical 57.61% 12.04% -- -- 131.54% 41.97% 38.60% 15.01% -- -- -- -- 53.97%
Diversified -- -- -- -- 33.31% -- -- -- -- -- -- -- -- -- -- -- -- -- --
Energy -- -- -- -- -- -- 73.93% -- -- -- -- -- -- -- -- -- -- 22.19%
Industrial 54.37% -- -- 30.56% -- -- 30.95% 23.36% -- -- -- -- -- -- 63.54%
Top stocks 59.46% 43.79% 37.59% 51.21% 48.66% 52.41% 21.19% -- -- -- -- 36.19%
Overall 56.65% 22.51% 33.78% 92.14% 44.77% 80.37% 66.97% 18.05% 33.23% 50.26%
Notes: (1) Annualized cost of equity estimates generated at 12/2008 from the total risk premium
(2) The UK Gilt/ Treasury 20 Year Bond rate is used in each case for risk free rate
(3) Top 10 stocks, ranked by market capitalization, selected for Egypt, Morocco, South Africa. Top 5 stocks selected for Kenya, Botswana and Tunisia.
Top 3 stocks selected for Zambia
38

SSRN Id1366845

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

SSRN Id1366845

Uploaded by

Copyright:

Available Formats

Sector Cost of Equity in African Equity Markets

JEL classification: G12, G15, O16

Electronic copy available at: http://ssrn.com/abstract=1366845

Electronic copy available at: http://ssrn.com/abstract=1366845

2. AFRICAN EQUITY MARKETS AND LIQUIDITY MEASUREMENT

(i). Africas securities markets

(ii). Liquidity constructs

Liu (2006) measure

(iii). Data: Sources

(iv). Data: Summary statistics relating to liquidity measures

3. EMPIRICAL MODEL: SIZE AND LIQUIDITY AUGMENTED CAPM

(i). Summary statistics relating to size-liquidity sorted portfolios

(ii) Performance of traditional CAPM against three-factor CAPM

Average Returns in North Africa

Average Returns in the Sub Saharan African Markets

Average Returns in South Africa and Namibia

Market: Sub Saharan Africa (Excl. RSA)

Market: South Africa

Morocco Financials 2.09% 5.72% 1.24000 5.27974

Tunisia Financials 0.92% 3.70% 0.53404 3.96711

Nigeria Financials 2.48% 8.56% 1.04028 4.72583

Kenya Financials 3.50% 9.46% 0.49657 4.37555

Botswana Financials 1.19% 3.68% 0.06252 2.88754

Namibia Financials 1.23% 7.25% 1.2277 8.1515

South Africa Financials 1.66% 6.86% -0.60161 3.76219

You might also like