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The efficiency of African equity markets

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  • David G. McMillan
  • Pako Thupayagale

Abstract

Purpose - In order to assess the informational efficiency of African equity markets (AEMs), the purpose of this paper is to examine long memory in both equity returns and volatility using auto‐regressive fractionally integrated moving average (ARFIMA)‐FIGARCH/hyperbolic GARCH (HYGARCH) models. Design/methodology/approach - In order to test for long memory, the behaviour of the auto‐correlation function for 11 AEMs is examined. Following the graphical analysis, the authors proceed to estimate ARFIMA‐FIGARCH and ARFIMA‐HYGARCH models, specifically designed to capture long‐memory dynamics. Findings - The results show that these markets (largely) display a predictable component in returns; while evidence of long memory in volatility is very mixed. In comparison, results from the control of the UK and USA show short memory in returns while evidence of long memory in volatility is mixed. These results show that the behaviour of equity market returns and risks are dissimilar across markets and this may have implications for portfolio diversification and risk management strategies. Practical implications - The results of the analysis may have important implications for portfolio diversification and risk management strategies. Originality/value - The importance of this paper lies in it being the first to systematically analyse long‐memory dynamics for a range of AEMs. African markets are becoming increasingly important as a source of international portfolio diversification and risk management. Hence, the results here have implication for the conduct of international portfolio building, asset pricing and hedging.

Suggested Citation

  • David G. McMillan & Pako Thupayagale, 2009. "The efficiency of African equity markets," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 26(4), pages 275-292, October.
    • Handle: RePEc:eme:sefpps:v:26:y:2009:i:4:p:275-292
    DOI: 10.1108/10867370910995726
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    Cited by:

    1. Kunal Saha & Vinodh Madhavan & Chandrashekhar G. R. & David McMillan, 2020. "Pitfalls in long memory research," Cogent Economics & Finance, Taylor & Francis Journals, vol. 8(1), pages 1733280-173, January.
    2. Adeabah, David & Abakah, Emmanuel Joel Aikins & Tiwari, Aviral Kumar & Hammoudeh, Shawkat, 2023. "How far have we come and where should we go after 30+ years of research on Africa's emerging financial markets? A systematic review and a bibliometric network analysis," Emerging Markets Review, Elsevier, vol. 55(C).
    3. Kuttu, Saint, 2018. "Modelling long memory in volatility in sub-Saharan African equity markets," Research in International Business and Finance, Elsevier, vol. 44(C), pages 176-185.

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