Size,Book-to-Market And Idiosyncratic Risk Anomalies In Major African Stock Markets

In this paper,I examine the size,book-to-market and idiosyncratic risk anomalies,as discovered in many other stock markets,in five major African stock markets,i.e.,Egypt,Kenya,Morocco,Nigeria and South Africa.First,I find that for the size-sorted quintiles,the average daily return of the smallest quintile is significantly higher than that of the largest quintile in South Africa,Egypt,and Morocco,but no such effect is detected in Nigeria and Kenya.Second,I show that for the book-to-market-sorted quintiles the average daily return of the highest quintile is significantly higher than that of the lowest quintile only in Egypt,but not in the other four markets.Third,in the monthly stock return predictability tests,I find that even though the conventional measure of aggregate idiosyncratic risk exhibits some predictive power for future stock returns,the dual-predictor method,which is developed to reduce the noise effect and is subsequently applied to the US stock market in Ruan,Sun,and Xu(2016),can substantially improve the predictive power of idiosyncratic risk in four of the five African markets,consistent with the effect of the dual-predictor on noise reduction.I conclude that idiosyncratic risk may be more important in African stock markets than the systematic risk factor proxies such as size and book-to-market,albeit book-to-market might be a very noisy measure by itself.