Abstract
The empirical evidence shows that, in comparison to Industrialized, Asian and Latin American countries, African stock markets recorded the best performance in a mean-variance space before the crisis, January 2000 to December 2007, with the highest average monthly returns and levels of total risk (standard deviation of returns) that equaled the score of Industrialized countries and were significantly lower than for Asian and Latin American stock markets. Their average systematic risk (Beta relative to the S&P 500) was significantly lower than that of their counterparts in other regions. However, during the crisis, January 2008 to February 2015, they recorded the sharpest declines among regions in their average returns and an increase in their total and systematic risk. Their average Sharpe and Treynor ratios, and their Jensen’s Alpha also underscored significant deterioration of their performance between the pre-crisis and the crisis period and ranked them from the best investment destination to the poorest one for a US-based investor. Results also show that African stock markets were prime candidates for inclusion in the equity portfolio of US-based investors seeking international diversification before the crisis, a situation that was reversed during the crisis for African countries and other regions alike. Weak recovery of African stock markets is documented by the inability of most of them to return to their pre-crisis index levels and the lower average returns that they have recorded since the peak of the global financial crisis.
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Notes
- 1.
The determination of the beginning month for the global financial crisis was based on the examination of the monthly returns of the S&P 500 which represents the largest stock market in the world and the chronological leading role of the US economy in the onset of the crisis. The data show that the S&P 500 recorded the following monthly returns: September 2007: +3.61 %, October 2007: +3.21 %, November 2007: −3.497 %, December 2007: +1.61 % and January 2008:−6.649 %. Therefore, considering that the negative return of January was unusually large and was followed by two consecutive negative monthly returns, the foregoing analysis will consider January 2008 the beginning month of the crisis. The pre-crisis period is deemed to be January 2000 to December 2007 and the crisis period January 2008 to February 2015. The crisis-period is arbitrarily given this name bearing in mind that it includes a recovery period that is specified in the last section of the study.
- 2.
The national stock market indices under study can, to a large extent, be replicated by Exchange Traded Funds (ETFs) that are assets traded on the stock market that track fairly accurately the movements of their respective stock market indices.
- 3.
The foregoing analysis does not take into account national differences in tax and legal systems and the degree of freedom of access to local stock markets for foreigners.
- 4.
Alternative criteria that are variants of Sharpe’s ratio are proposed by Roy (1952), Sortino and van der Meer (1991), Sharpe (1994) and Modigliani (1997). Several empirical studies have used Sharpe’s ratio to examine the performance of mutual fund managers; See Bacon (2008), Barucci (2003), Feibel (2016), Gibbons et al. (1989), Jobson (1981) and Lo (2002).
- 5.
For portfolio selection in the mean-variance space see Markovitz (1952).
- 6.
Treynor’s ratio is based on the assumption that CAPM is the equilibrium pricing model for risky assets. Alternative pricing models such as the consumption-based asset pricing model (Breeden 1979), the intertemporal asset pricing model (Merton 1973) and the Arbitrage Pricing Theory (Ross 1976) have proposed different measures of systematic risk which, if applied instead of the CAPM, would yield different ratios of excess return per unit of systematic risk.
- 7.
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Seck, D. (2017). The Performance of African Stock Markets Before and After the Global Financial Crisis. In: Seck, D. (eds) Investment and Competitiveness in Africa. Advances in African Economic, Social and Political Development. Springer, Cham. https://doi.org/10.1007/978-3-319-44787-2_1
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