Regionally integrated asset pricing on the African stock markets: Evidence from the Fama French and Carhart models

The study explores regionally integrated asset pricing on the African Stock Markets (ASMs) via the Fama-French model. It investigates the ability of the model to capture African equity returns at the regional level. It also explores the question of absolute versus relative measures of size and BM when securities are pooled across markets. Absolute proxies may have potential confounding effects or may be appropriate in integrated markets. The study achieves this by scaling the size and BM of each firm by its cross-sectional means or cross-sectional standard deviations for the security's market on the portfolio formation date. The analysis employs the Fama-French model in a cross-country setting. Evidence is provided that both size and BM effects exist on the pooled ASMs. The BM effect, however, appears stronger than the size effect. Also, the pricing errors are higher when size and BM are measured relative to their individual country averages rather than to that of the entire pooled sample. We observe lower mispricing when size and BM are estimated in relation to their cross-sectional standard deviations for the respective countries. Evidence is provided that asset pricing on the ASMs is largely not regionally integrated. The evidence shows that the effect of illiquidity in describing the returns of a pooled sample could be overstated by uncontrolled disparities between the characteristics of the pooled markets if the markets exhibit some degree of segmentation.