Estimating the conditional equity risk premium in African frontier markets

Ferdinand Othieno and Nicholas Biekpe

Research in International Business and Finance, 2019, vol. 47, issue C, 538-551

Abstract: This paper estimates the forward-looking coefficients of risk aversion and the equity risk premia in frontier equity markets in Africa. Applying the Bilinear GARCH (BGARCH) in the consumption-based asset pricing framework, we link the stochastic discount factor to conditional volatility to estimate the predicted equity risk premium using monthly data between January 1998 and June 2016. We find that in addition to accounting for the covariation between the lagged values of the Stochastic Discount Factor and asset returns, it is crucial to account for the time varying estimates of the coefficients of risk aversion to mimic the volatility structure in the different markets. The presence of risk aversion coefficients that take on both positive and negative values at different times provides insight into the different hedging attributes of the African stock markets though the diversification benefits that could arise from such insights are an open question that lay ground for further work in this area. The results presented in this paper provide a framework for conditional asset pricing in African Frontier Markets which is more consistent with the forward-looking approach to risk estimation than the traditional risk premium models.

Keywords: Predictive equity risk premium; Stochastic discount factor; Bilinear GARCH; African frontier Markets (search for similar items in EconPapers)
JEL-codes: G12 G14 M41 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0275531918302551
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:47:y:2019:i:c:p:538-551

DOI: 10.1016/j.ribaf.2018.09.015

Access Statistics for this article

Research in International Business and Finance is currently edited by T. Lagoarde Segot

More articles in Research in International Business and Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().