Conditional Pricing of Currency Risk in Africa's Equity Market

Odongo Kodongo and Kalu Ojah

Working Papers from African Economic Research Consortium

Abstract: In this paper, we sought to establish whether Africa's volatile currencies drive equity risk premium. We use the stochastic discount factor (SDF) framework to estimate various conditional specifications of the International Capital Asset Pricing Model through generalized method of moments technique. Our results show strong evidence of conditional, time-varying currency risk premium in equity returns. Currency risk is also perceived by international investors as important in informing the equities pricing kernel. We also find evidence that international investors are worried about Africa's small size equity markets and build anticipated low trading into their pricing calculus.

Date: 2018-12-01
Note: African Economic Research Consortium
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Journal Article: Conditional pricing of currency risk in Africa's equity markets (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:aer:wpaper:5861512d-a0d7-46f8-8fb8-b59fb1fc161c

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