Volatility Risk Pricing, Market Regulations and Cross Section of Stock Returns in Emerging Markets
Yusuf, Ismaila Akanni PhD; Mustapha, Saidi Atanda PhD

Investors in Africa’s equity markets are part of the economic agents as they tend to provide capital for investments and financial sector development. Studies have established that financial sector development propelled economic growth. In recent time, equity prices have declined tremendously in Africa owing to macroeconomic and market risks asforeign investors are pulling out their funds and domestic participation are more of dropping the stocks. The huge information deficits about the relationships between these risks and portfolio returns remain a vacuum that have resulted into loss of confidence. This paper provides information on the relationship between these risks and portfolio of returns using African equities. The results show that portfolio returns depend not only on the macro and market risks that is captured by a risk-augmented CAP Model, but also on the type of equity mispricing. Empirically, these risks induced return bias when estimated by volatility and variance ratio of residual returns. The findings also show that market regulations implemented during the study period impress positively on equity portfolio returns. Given these results, equity investors are encouraged to increase their stake in Africa markets to increase portfolio returns. Again, market regulators should focus more on regulations that will strengthen liquidity and protect investors’ interest.

Full Text: PDF     DOI: 10.15640/jmm.v5n2a10