This study examines the effectiveness of the state in stimulating stock market activity in sub-Saharan Africa (SSA) using fiscal policy, governance quality and stock market as the main determinant variables. Using annual data from six selected sub-Saharan African economies and employing a dynamic panel data estimating technique, we find that government effectiveness stimulates capitalization while business regulations decrease it in SSA. In addition, we find that final consumption expenditure, interest rate spread and credit to the state increase capitalization whereas credit to the private sector and inflation had adverse effects. With respect to business regulations, our study reveals that starting a business, closing it and enforcing contracts engender stock market activity in SSA. Among the several variables that stimulate stock market activity; only foreign direct investment (FDI) did increase capitalization. Thus, the study concludes that since not all government institutions and business regulations are critical to stock market development, various governments should be careful and selective in their economic stimulants if they want to develop their stock markets.

PurposeSub-Saharan African (SSA) stock exchanges are imperfect and inefficient. Therefore, orthodox finance theories are unable to completely explain their market returns. Such models mainly identify anomalies when applied to the sub-region. Consequently, this paper develops an original theoretical model to better explain market returns on the sub-continent.Design/methodology/approachThis paper develops an alternate analytical framework that combines adaptive expectations, Keynesian LM model and modified uncovered interest parity (UIP) formulations to address empirical anomalies identified by previous literature when analyzing SSA's inefficient stock markets. Using panel data, the study first computes the fixed as well as random effects regressions and, later, a Generalized Method of Moments (GMM) dynamic panel regression for further empirical analysis.FindingsBoth the fixed and random effects regression results indicate that the relative output-money supply disparity and foreign inflation-money supply growth rate spread have positive effects on market returns in SSA. On the other hand, foreign interest rates have an inverse effect. Although the GMM dynamic panel regression has similar results, it additionally finds that market returns in SSA are autoregressive. This suggests that past returns are persistent.Research limitations/implicationsA key implication is that multipliers and transmission mechanisms in SSA may take longer to adjust, thereby limiting short-run market returns. Also, policymakers must encourage a critical mass of firms to list in order to enhance efficiency. Additionally, policy variables significantly influence returns. One limitation is the high market segmentation in SSA. This heightens heterogeneity, emphasizing fixed effects.Practical implicationsAlso, the findings of this study may not apply to all emerging economies as SSA economies are highly heterogeneous.Social implicationsThe segmented nature of SSA stock markets may have implications for income inequality and the distribution of resources within the economy. Also, it indicates that there are limits to how firms use capital markets on the sub-continent.Originality/valueThis paper abstracts from the strict ideal market conditions prescribed by modern finance theories and develops an original modified UIP model. It finds that SSA stock markets may be more sensitive to policy variables, instead of determinants postulated by orthodox finance concepts. The study offers opportunities for further critical examination of returns in imperfect frontier markets.

This paper proposes a theoretical model which is used to illustrate that transactions costs and a risk premium are not sufficient to explain the excess currency bid-ask spread. It illustrates that only in market structures that engender market power can foreign exchange dealers widen their currency bid-ask spread to exploit adverse economic forces and also exploit a relatively price inelastic demand for foreign exchange to charge higher-than-market-determined risk premiums thus charging an excess currency bid-ask spread.

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