The price of microstructure risk on emerging stock markets: towards an integration of African financial markets

Abstract

African stock markets have particular characteristics, chiefly the extreme volatility of their returns, which would imply a significant risk premium. Very few studies attempted to investigate the existence of this risk premium for some return determinants on these markets. The purpose of this article is to evaluate the price of the microstructure risk on some selected African emerging stock markets, including JSE, NSE and BRVM. The data used is from these stock markets databases and ranges from 2000 to 2014. Generalised least square and generalised estimating equations methods are used at the last step of a modified version of Fama and Macbeth's (1973) sequential estimation technique, on a set of portfolio formed based on two different strategies. The results show that microstructure risk is not significantly priced on individual stock markets. However, it is better priced when portfolios are constituted with stocks of several financial markets. Indeed, except the liquidity, all considered microstructure risk factors are significantly and consistently priced. This highlights the fact that the risk premium is more attractive when markets are integrated. The study points out the need for the globalisation of African stock markets and a necessity to facilitate information flow.

Microstructure and asset pricing: An insight on African frontier stock markets

“…Portfolios are used instead of individual stocks simply because it is a way to reduce the estimation bias and benefits from the diversification effect as advocated in the financial literature (Dalgaard, 2009; Fama & Macbeth, 1973; Hikouatcha et al., 2016). From the existing literature (Amihud & Mendelson, 1986; Dalgaard, 2009; Hikouatcha et al., 2022), the portfolios used are formed on the one hand according to the individual stock's systematic risk and, on the other hand, according to a double criterion (liquidity and systematic risk). The portfolio's construction process here follows Amihud and Mendelson (1986), and Dalgaard (2009), at least as far as the technique and proxies are concerned.…”