Stock (Mis) Pricing and Diversification in Africa: Evidence from Selected African Exchanges

This paper ascertains the extent of mispricing in equity portfolios, mispricing-divestment relation, and the role of African equities as risk diversification strategies during commodity market turbulence. Following Baur and Lucey (2010), one identifies an arbitrary commodity market crisis to be 1%, 5%, and 10% declining moments in returns. However, their approach is extended by using African equities as a safe-haven against gold. A risk-augmented CAPM is specified to estimate the mispricing in equity portfolios while the risk diversification model follows Baur and Lucey (2010). For all the estimations, the regressions are run on daily data from 5th January 2010 to 30th December 2015. First, the results show the presence of transient mispricing in the portfolio's returns of African equities regardless of the firms’ liquidity and volatility levels. More so, stronger mispricing is observed using an alternative specification. Second, mispricing causes significant divestment in big size portfolios. Third, there is a clear manifestation of strong, safe-havens between South Africa and Cocoa markets; Egypt and Platinum markets; and Morocco and Oil markets, respectively. However, the Nigerian equities can be a successful diversifier for oil and cocoa during market turmoil. The conclusion is that mispricing in a portfolio of equity returns is due to the low frequency of trading and that Africa’s equity markets are risk diversifiers and safe-havens for commodities. The paper recommends the jettisoning of Investors’ buy and hold trading strategy and encouraging the establishment of African commodity exchange to achieve the desired inclusive growth.