Conditional Heteroscedasticity and Stock Market Returns: Empirical Evidence from Morocco and BVRM

Using data from Casablanca (Morocco) and Bourse Régionale des Valeurs Mobilières (BVRM) stock markets, this paper investigates and compares different distribution density and forecast methodology of three generalised autoregressive conditional heteroscedasticity (GARCH) models for Morocco and BVRM indices. The symmetric GARCH and asymmetric Glosten Jagannathan and Runkle (GJR) version of GARCH (GJR-GARCH) and Exponential GARCH methodology are employed to investigate the effect of stock return volatility in both stock markets using Gaussian, Student-t and Generalised Error distribution densities. The study further examines the forecasting ability of each GARCH model using alternative densities. In both markets, the EGARCH results show that negative shocks will have a greater impact on future volatility than positive shocks of the same magnitude, confirming the existence of leverage effect. However, for both markets, the GJR estimates imply that positive instead of negative shocks will have a higher next period conditional variance. This means that positive instead of negative shocks would have greater effects on next period volatility. Regarding forecasting evaluation, the results reveal that the symmetric GARCH model coupled with fatter-tail distributions present a better out-ofsample forecast for both stock markets

The Cost of Equity Capital in Emerging Market – The Case of Kenya

Risk is often expressed as cost ofcapital in the context of investment valuations.The estimation of an appropriate discount rate toevaluate investment cash flows in order todetermine its viability is the most important inthe capital budgeting process, whether it is amultinational or small size company. From astrategic point of view, determining theappropriate cost of equity capital is critical inreducing the uncertainty that multinationals(MNCs) and domestic companies face wheninvesting in different countries. Differences inrisk and a lack of understanding of howemerging African stock market returns areinfluenced by the developed markets, as well aslack of reliable long-standing historical marketdata, are factors that international investors andcorporate managers have to cope with. Mostcompanies estimate their cost of equity capitalusing the Capital Asset Pricing Model (CAPM).However, the use of CAPM to estimate cost ofequity capital in emerging African capitalmarkets has numerous challenges, which arediscussed in the literature below. This study isdesigned to empirically investigate whether theCAPM is a sufficient asset pricing model toestimate cost of equity capital in Kenya. A timeseries methodology was followed and the resultshowed that although the CAPM’s betasignificantly explains equity returns, there areother risk factors not captured by CAPM. Thismeans corporate managers and investors mustbeware

Capital asset pricing model and the three factor model: empirical evidence from emerging African stock markets

This thesis explores two celebrated asset pricing models by investigating whether or not the capital asset pricing model (CAPM) and the Fama-French three factor model apply in Emerging African Stock Markets (EASM). While Sharpe (1964) and Lintner (1965) developed the capital asset pricing model (CAPM), it has been widely tested by finance researchers and applied in practice. The central theme of the CAPM is that the only risk variable that affects asset returns is the market factor (beta). However, empirical evidence suggests that the beta alone is not sufficient to wholly explain variation in asset returns (Jensen, 1968; Jensen et al, 1972). A search for an appropriate asset pricing model has led to the development of multifactor models (Ross, 1976; Fama and French, 1992; Carhart, 1997). Fama and French (1992 and 1993) introduced the size and BE/ME anomalies to the academic literature and advocates that it might be driven by changes in microeconomic factors missed by the single factor CAPM. This study adopts Jensen (1968) version of Sharpe-Lintner CAPM and follows Jensen et al. (1972) and Fama and French (1993) time-series approaches. The study provides substantial evidence of the benefits of volatility as augmenting factor in the classic CAPM in explaining asset returns in a new application to Africa and other emerging markets with similar economic characteristics. It was demonstrated that a pricing model that includes both market risk premium and volatility risk premium significantly captures patterns of returns in Africa than the classic CAPM or Fama-French model. Furthermore, this study makes three more important contributions to the literature on emerging African capital markets as follows: 1. That beta on its own cannot fully explain risk in Africa per CAPM’s assertion as returns can be related to other non-beta factors. 2. The evidence here produces firm contradiction to the growing literature that size and BE/ME are fundamental risk factors. These two variables are not risk factors and indeed, small and value firms do no attract additional compensation for risk in Africa. 3. Lack of integration of African stock markets with the world market means that country specific risk as measured by volatility is persistent across all five countries and therefore volatility augmented asset pricing model is more appropriate than classic CAPM or multifactor model with size and BE/ME. Unlike Fama-French and liquidity augmented models, this model is underpinned by theory. Even, in circumstances where volatility risk premium is negative as documented elsewhere and in this study for certain assets in Africa; the model provides useful information for portfolio construction/allocation and hedging in line with Merton (1973) ICAPM

Stock Return Effects of Accounting Information and Institutional Quality

This paper examines the implications of accounting information quality (AIQ) and institutional quality (INQ) for stock return. We sample 39,490 listed firms across 45 countries and employ System GMM estimator as a methodological approach to shed further light on the accounting information quality-stock return nexus by examining the complex interaction between three key variables: AIQ and INQ and stock return. The results show that INQ improves AIQ which in turn impacts on stock returns in countries with high bureaucratic quality and legislative strength. Our analysis further shows that firm cash flows are more persistent than earnings showing that cash flows provide better indication of long-term sustainability of a firm than earnings. There is evidence to suggest that conservative accounting results in reversal of reported losses in future periods

Bank opacity and risk-taking: Evidence from analysts’ forecasts

We depart from existing literature by invoking analysts’ forecasts to measure banking system opacity and then investigate the impact of such opacity on bank risk-taking, using a large panel of US bank holding companies, 1995-2013. We uncover three new results. Firstly, we find that opacity increases insolvency risks among banks. Secondly, we establish that the relationship between opacity and bank risk-taking is accentuated by the degree of banking market competition. Thirdly, we show that the bank business model moderates the risk-taking incentives of opaque banks, albeit only marginally. Overall, these findings suggest that the analysts’ forecast measure of bank opacity is useful for understanding risk-taking by publicly-traded banks, with important implications for bank stability

Modelling Exchange Rate and Interest Rate Volatility Persistence in Emerging African Economies

This study investigates volatility persistence of exchange and interest rates in Africa taking into account the rate of volatility decay. Generalized autoregressive conditional heteroscedasticity (GARCH) model is used to estimate volatility persistence for these economies. The results presented in this study suggest that there is volatility persistence in emerging African exchange rate and interest rate markets. Further empirical estimates reveal that rate of volatility decay varies considerably among the economies, for instance, exchange rate volatility in Nigeria diminishes to half of its original size within two months, while it takes approximately 12 months for volatility in Ghana to diminish to half of its original size. The study concludes that exchange and interest rates volatility risk exist in emerging African economies. The results of this study therefore have important implications for international trading, international portfolio diversification, and asset pricing and financial risk management

Environmental tax, carbon emmission and female economic inclusion

AbstractThis research examines the nexus between environmental tax, carbon emission, and female economic inclusion. The study employs a quantitative research method, utilizing the Generalized method of moments (GMM) on a dataset of 65 countries from the period 1994 to 2020. The research finds that environmental tax has a significant negative effect on carbon emission, and that firms with a higher level of female economic inclusion tend to have lower carbon emission levels. Furthermore, the research shows that firms with a higher level of female economic inclusion are more likely to implement environmentally sustainable practices, which in turn reduces their carbon emission levels. These findings suggest that policies that promote environmental taxation and female economic inclusion can be effective in reducing carbon emissions and promoting sustainable business practices. The sampling technique used in this study is purposive sampling, where 64 countries were selected based on their availability of data on environmental tax, carbon emissions, and female economic inclusion. The population of the study comprises all countries that have data available on these variables between the period of 1994 to 2020. While there are limitations to this study, including the need for further research to fully understand the complex relationship between environmental taxation, carbon emissions, and female economic inclusion, this research represents an important contribution to the literature on these critical issues

Environmental tax and global income inequality: A method of moments quantile regression analysis

AbstractEven though Environmental tax policy impacts inequality theoretically, empirical studies remain scanty not only in the context of volumes and the estimation approaches but are also focused on selected advanced countries, communities, households, and emerging countries, the neglect of the global or big picture effect, which is essential for measuring the overall effect of the collective and individual country-concerted efforts in addressing this global cancer. We provide empirical evidence in the global context using the novel method of moments quantile regression. We found that Income Inequality across the globe is sharply reduced by restrictive environmental tax policy, a finding that has ramifications for global sustainable development, particularly in dealing with the ravaging effects of Covid-19

Information Asymmetry, Leverage and Firm Value. Do crisis and growth matter?

Drawing on pecking order and agency cost theories, we assess the extent to which information asymmetry is an important determinant of firm value and the extent to which this relationship is conditional on the leverage level of firms. We also assess the impact of information asymmetry on firm value during the pre and post 2007/09 financial crisis period and for high and low growth opportunity firms. Using a large sample of UK firms, our empirical findings suggest that information asymmetry adversely impacts firm value, and that this effect decreases with firm's leverage. We also find that leverage has a negative effect on firm value, and that the marginal effect of leverage is lower for information asymmetric firms. Further, we find that the relation between information asymmetry and firm value is more pronounced in the post-crisis period than the pre-crisis period. Finally, we show that the impact of information asymmetry on firm value is higher (lower) for firms with high (low) growth opportunities