Drivers of Stock Market Returns in Sub-Saharan Africa: Evidence from Selected Countries

Abstract

This study investigates the drivers of stock market returns in selected Sub-Saharan African (SSA) economies. Secondary monthly data from January 2000 to December 2016 were collected and analyzed using the dynamic ordinary least square methods (DOLS) and fully modified ordinary least squares (FM-OLS) models to identify endogeneity and serial correlation and check for robustness. In accordance with a priori expectations, this study has proved the key driver of stock market returns across the selected countries is its lag. Although considerable literature exists on the principal determinants of stock market returns in SSA, there is an absence of empirical comparative studies of SSA countries that examine other salient internal and external variables. This study recommends that stockbrokers do not underestimate the importance of previous market performance, as it can potentially inform stock market predictions.Contribution/Originality: This study is one of only a few that have investigated the comparative effect of both internal and external macroeconomic factors on stock market returns in Sub-Saharan Africa. INTRODUCTIONSome economies in Sub-Saharan Africa (SSA) have interconnected with other developing and developed economies to a greater extent as a result of globalization and international trade and investment. However, the openness of the SSA economies to the global economy has led their stock markets to become more susceptible to changes in external macroeconomic variables, such as exchange rates, crude oil prices, and international stock market indices (Adjasi et al., 2008).Studies have reasserted this and established that such external macroeconomic factors as stock market indices, especially those of developed economies, exert an influence on stock markets in emerging and/or developing economies. This influence usually presents as co-movement between developed and emerging stock markets