A Review of Asset Pricing With Risk-Return Relations In Sub-Saharan Africa

Authors

  • Yao Hongxing  School of Finance and Economics, Jiangsu University, China
  • Solomon Duduchoge  abKoforidua Technical University, Koforidua,Ghana
  • Chris Benjamin Ampimah  Cape Coast Technical University.

Keywords:

Liquidity, Liquidity Risk, Asset Pricing, Emerging Market, Developed Market, sub-Sahara Africa.

Abstract

This study examines the effect of illiquidity risk on expected excess stock returns in sub-Saharan Africa. Evidence exists to show that an expected stock return is positively correlated with market illiquidity in Sub-Sahara Africa. We also find evidence to show that global risk aversion has direct influence on the stocks markets of these sub-Saharan countries. Furthermore, we find that the US market serve as an important driving force in sub-Sahara Africa market as South Africa which play a bigger role in the region as far as market capitalization is concern has majority of its shares own by investors outside the region. It emerged that most markets in emerging sub-Saharan Africa have smaller capitalization and should therefore hasten their desire for regional market integration. We find cross-listing of some stocks in sub-Sahara Africa on the JSE and thus any downturn in the JSE also has serious consequences on their stock.

References

  1. Acharya, V.V. and L.H. Pedersen (2005), 'Asset pricing with liquidity risk', J.Financ. Econ., 77 (2), 375-41
  2. Acquah-Sam, E. (2014), 'The State of Ghana’s Capital Market', Journal of Applied Economics and Business, 2(3), 55-66.
  3. Acquah-Sam, E., and K.  Salami (2013), 'Knowledge and participation in capital market  activities:  The  Ghanaian  Experience',  International  Journal  of  Scientific  Research  in  Education, 6(2), 189-203.
  4. Ackert L.F., R. Deaves(2010), 'Behavioral Finance: Psychology, Decision-Making, and Markets ' ,Cengage Learning, 19-35
  5. African Union (2008), ' Report of the Feasibility Study on the Establishment of the Pan African Stock Exchange", Department of Economic Affairs, December.
  6. Amihud, Y., and H. Menendelson (1986), 'Asset pricing and the bid-ask spread', Journal of Financial Econnomics, 17, 223-249.
  7. Amihud, Y. (2002), 'illiquidity and stock returns: cross-section and time –series effects', Journal of Financial Markets, 5, 31-56.
  8. Amihud Y. and H.Mendelson(1980) 'dealership market: market-making with inventory',Journal of Financial Economics, 31-53.
  9. Anthonisz, S. A. and J.Putniņš,Tālis (2014), 'Asset Pricing with Downside Liquidity Risks', SSRN eLibrary.
  10. Bekaert, G., C.R. Harvey and C. Lundblad (2007), 'Liquidity and expected returns: Lessons from emerging markets',Review of Financial Studies,20, 1783-1831.
  11. Berkman H., and V.R. Eleswarapu(1998), 'Short-term traders and liquidity: A test using Bombay Stock Exchange data', Journal of Financial Economics, 47,339-355.
  12. Brailsford, T., C. Gaunt and M.A., O'Brien (2012), 'The investment value of the value premium', Pac. Basin Financ. J., 20 (3), 416–437.
  13. Brennan, M.J., W. Huh and A. Subrahmanyam(2011), 'An analysis of the Amihud Illiquidity premium',Working paper,UCIA.
  14. Brennan M.J., and A.  Subrahmanyam (1996), 'Market microstructure and asset pricing:on the compensation for illiquidity in stock returns',J.Financ. Econ,41 (3), 441-464.
  15. Chan,H., and  R.W Faff (2005), 'Asset pricing and illiquidity premium ' Financial Review, 40,429-458.
  16. Chan K., A .Hameed and W. Kang (2013), ‘Stock price synchronicity and liquidity’, Journal of Financial Markets, 16(3), 414-438.
  17. Chan, K., V. Covrig and L.Ng (2005), 'What determines the domestic bias and foreign bias? Evidence from mutual fund equity allocations worldwide'. Journal of Finance, 60, 1495–1534.
  18. Chiang,T.C.and  D. Zheng(2010), 'An empirical analysis and herd behavior in the global stock markets'. Journal of Banking and Finance, 34, 1911-1921.
  19. Conrad,J., R.F. Dittmar and E .Ghyselse (2013) 'Ex ante skewness and expected returns', Journal of Finance, 68, 85-124.
  20. Chopra, N., J. Lakonishok (1992) 'measuring abnormal performance: Do stocks overreact? ‘Journal of Financial Economics, 31,235-268.
  21. Chordia, T., R.Roll and A. Subrahmanyam(2000), 'Commonality in liquidity'.Journal of Financial Economics, 56, 3-28.
  22. Chiang, T.C., and D. Zheng(2015), 'Liquidity and Stock Returns: Evidence from international
  23. markets’, Global Finance Journal,
  24. Constantinides, G.M., and J.B. Donaldson (1986), 'Capital market equilibrium with transaction costs', Journal of Political Economy, 94,842-862.
  25. Copeland,T.C.,and  D.Galai (1983), 'Information effects on the bid-ask spread', Journal of Finance 38, 1457-1469.
  26. Cochrane, J (2001), 'Asset Pricing. Princeton University Press, New Jersey.
  27. Databank (2004). Epack Investment Fund Limited Annual Report, Ghana.
  28. Datar, V.T., Y.N. Naik and R. Radcliffe (1998), 'Liquidity and stock returns: an alternative test ‘J.Financ.Mark,1 (2), 203-219.
  29. De Bondt, W.F.M., and R.H. Thaler (1987), 'Further evidence on investors overreaction and stock market seasonality’, Journal of Finance, 42,557-581.
  30. Duffie, D., N. Garleanu and, L.H. Pedersen (2000), 'Over-the counter markets. Econometrica, forthcoming.
  31. Duffie, D., N. Garleanu and, L.H. Pedersen (2003), 'Valuation in over-the counter markets,' unpublished working paper, Graduate school of Business, Stanford University.
  32. Easley, D.B., and M. O’Hara (1987), 'Price, trade size and information in securities markets', Journal of Financial Economics, 19, 69-90.
  33. Easley.D., S. Hvidkjaer and M. O,Hara (2010), 'Factoring information into returns',Journal of Financial and Quantitative Analysis,45,293-309.
  34. Eleswarapu, V.R. (1997), 'Cost of transacting and expected returns in the Nasdaq market', Journal of Finance, 52, 2113-2127.
  35. Ericsson, J., and O.Renault (2000), 'Liquidity and credit risk', working paper, McGill University, Montreal.
  36. Fabre, J., and A. Frino (2004), 'Commonality in liquidity: Evidence from the Australian stock exchange ', Account. Financ. 44 (3), 357-368.
  37. Fama, E.F., and K.R. French (1993), 'Common risk factors in the return of stocks and bonds’, Journal of Financial Economics,33, 3-56
  38. Fama, E. F., and K. R.  French (1992), 'the cross-section of expected stock returns’, Journal of Finance, 47,427–465.
  39. Fama, E. F., and K. R. French (1993), 'Common risk factors in the returns on stocks and bonds ', Journal of Financial Economics, 33, 3–56.
  40. Fama, E. F., and J. D. MacBeth (1973), 'Risk, return, and equilibrium: Empirical tests',Journal of Political Economy, 81,607–636.
  41. Fu, F.(2009), 'idiosyncratic risk and the cross-section of expected  stock returns', Journal of Financial Economics, 91, 24-37.
  42. Garbade, K. and W. Silber (1979), 'Structural organization of secondary markets: clearing frequency,dealer activity and liquidity risk', Journal of Finance, 34, 577-593.
  43. Garleanu, N., and L.H. Pedersen (2004), 'adverse selection and the required return', Review of Financial Studies, 17, (3), 643-665.
  44. Garman, M., (1976), 'Market microstructure’, Journal of Financial Economics, 3, 257-275.
  45. Ghysels,E., and J.P. Pereira(2008), 'Liquidity and conditional portfolio choice: A non-parametric investigation', Journal of Empirical Finance, 15,679-699.
  46. Glosten,L.R., and  P.R. Milgrom(1985), 'Bid ,ask and transaction prices in specialist market with  heterogeneously informed traders', Journal of Financial Economics, 14, 71-100al Economics 3, 257-275.
  47. Goyenko,R.Y., C.W. Holden and  C.A. Trzcinka(2009), 'Do liquidity measures measure liquidity? 'J.Financ.Econs. 92(2)153-181.
  48. Griffen,J.M.(2002) , 'Are the Fama French factors global or country specific? ' Review of Financial Studies,15,783-803.
  49. Grossman, S., and M. Miller (1988), 'Liquidity and market structure', Journal of Finance, 43, 617-633.
  50. Harris, L. (1991), 'Stock price clustering and discreteness’, Review of Financial Studies, 4, 389-415.
  51.  Hameed, A., W. Kang and S. Viswanathan(2010), 'Stock market declines and liquidity', J. Financ., 65 (1), 257–293.
  52. Hasbrouck, J. (2009), 'Trading costs and return for U.S. equities: estimating effective costs from daily data', J.Financ. 64(3), 1445-1477.
  53. Holmstrom, B., and J.Tirole (2001), LCAPM: 'A liquidity-based asset pricing', Journal of Finance, 56, 1837-1867.
  54. Huang, M. (2003), 'Liquidity shocks and equilibrium liquidity premia', Journal of Economic Theory, 109,104-129.
  55. Huberman, G.,and  D. Halka (1999), 'Systematic liquidity', Columbia Business School.
  56. Jones, C.M. (2001), 'A century of stock market liquidity and trading costs’, Graduate School of Business, Columbia University.
  57. Jones, C.M.(2002) , 'a century of stock market liquidity and trading costs' ,Manuscript: Columbia University.
  58. Keim , D.B., and A. Madhavan (1996), 'The upstairs markets for large-block transactions: analysis and measurement of price effects', Review of Financial Studies, 9,1-36.
  59. Kraus,A., and H.Stoll (1972), 'price impacts of Block Trading on the New York Stock Exchange',J. Finance,27,569-588.
  60. Kyle, A.S. (1985), 'Continuous auctions and insider trading', Econometrica, 5 3(6), 1315-1335.
  61. Lakonishok, J., A. Shleifer and R.W. Vishny (1994), 'Contrarian investment, extrapolation, and risk',Journal of Finance, 49, 1541–1578.
  62. Lam, K.S.K., and L.H.K.Tam (2011), 'Liquidity and asset pricing: Evidence from the Hong Kong stock market', J.Bank.Financ., 35(9), 2217-2230.
  63.  Lee, K.H.(2011), 'The World price of liquidity risk', J.Financ.Econ.,99(1),136-161.
  64. Lesmond,D.A., J.P. Orden and C.A. Trzcinka (1999), 'A new estimate of transaction costs',Rev.Financ.Stud.,12(5), 1113-1141.
  65. Lesmond, D.A. (2005), 'Liquidity of emerging markets', Journal of Financial Economics, 77, 411–452.
  66. Levine, R., and S. Schmukler (2006), 'Internationalization and stock market liquidity',Review of Finance, 10,153–187.
  67. Limkriangkrai,M., R.B. Duran and I. Watson(2008), 'Is liquidity the missing link? 'Account.Financ., 48, 829-845.
  68. Liang, S.X., and J.K.C. Wei (2012), 'Liquidity risk and stock returns around the world',Journal of Banking and Finance, 36, 3274–3288.
  69.  Liu,W. (2006), 'A liquidity-augmented capital asset pricing model',.J.Financ.Econ.,82 (3), 631-671.
  70. Ljusgqvist, A., and M., Richardson (2003), 'the cash flow, return and market risk characteristics of private equity',New York University.
  71. Lustig, H. (2001), 'the market price of aggregate risk and the wealth distribution',Unpublished working paper, Stanford University.
  72. Madhavan, A. (1992), 'Trading mechanisms in securities markets', Journal of Finance, 47, 607-641.
  73. Markiel G.B. (1995). Returns from Investing in Equity Mutual Funds 1971 to 1991,the Journal of Finance. 50(2),549–572
  74. Martinez M.A., B.,Neito., G. Rubio and  M .Tapia (2005), 'asset pricing and systematic liquidity risk: an empirical investigation of the Spanish stock market', International Review of Economics and Finance, 14, 81-91.
  75. McLean, R.D. (2010), 'Idiosyncratic risk, long-term reversal, and momentum', Journal of Financial and Quantitative Analysis, First View, 1–4.
  76. Mallison M,French N,(2000). "Uncertainty in property valuation – The nature and relevance of uncertainty and how it might be measured and reported", Journal of Property Investment & Finance, Vol. 18 Iss: 1, pp.13 - 32
  77. Naranyan, P. K., and X. Zheng(2010), 'Market liquidity risk factor and financial market anomalies: Evidence from Chinese stock market’, Pacific-Basin Finance Journal, 18,509–520.
  78. Nguyen N.H., and K.H. Lo (2013), 'Asset returns and liquidity effects: Evidence from a developed’, Pacific-Basin Finance, 1175–1190.
  79. Pastor, l., and R.F.  Stambaugh (2003), 'liquidity risk and expected stock returns', Journal of Political Economy, 111,642-685.
  80. Persaud, A.D. (2003), 'Introduction.In:Persaud,A.D.(Ed.),Liquidity Black Holes,Risk'.
  81. Rouwenhorst,  K.G. (1999),  'Local  return  factors  and  turnover  in  emerging  stock  markets',  The Journal of Finance LIV, (4), 1439–1464.
  82. Sen, S.S.  (2009),  'On stock market illiquidity of the NES of India', The  IUP  Journal  of  Financial  Economics  VII,  (3  &  4),  95–104.
  83. Stoll, H.R. (1978), 'the pricing of security dealer services: an empirical study of NASDAQ stocks', J.Financ. 33(4), 1153-1172.
  84. Vayanos, D., and J.L. Vila (1999), 'Equilibrium interest rate and liquidity premium with transaction costs', Economic Theory, 13, 506-539.
  85. Vayanos, D. (1998), 'Transaction costs and asset prices: a dynamic equilibrium model',Review of Financial Studies, 11, 1-58.
  86. Whaley, R.E. (2009), 'Understanding the VIX', Journal of Portfolio Management, 35, 98–105.
  87. Wood, J.H., and N.L.Wood (1985), 'financial markets', Harcourt Brac

IInternational Journal of Scientific Research in Computer Science, Engineering and Information Technology

Downloads

Published

2017-04-30

Issue

Volume 2, Issue 2, March-April-2017

Section

Research Articles

License

Copyright (c) IJSRCSEIT

Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 International License.

How to Cite

[1]
Yao Hongxing, Solomon Duduchoge, Chris Benjamin Ampimah, " A Review of Asset Pricing With Risk-Return Relations In Sub-Saharan Africa, IInternational Journal of Scientific Research in Computer Science, Engineering and Information Technology(IJSRCSEIT), ISSN : 2456-3307, Volume 2, Issue 2, pp.267-280, March-April-2017.