Market Integration and Informational Efficiency of Africa's Stock Markets

Abstract

Market integration and informational efficiency of stock markets are key policy variables, yet have long been studied as separate concepts. In this article, we address the forthright question of whether a more integrated stock market is also a more informationally efficient market using a panel of 11 of Africa’s leading stock markets for the period 2002-2014. We proxy market integration using the adjusted pricing error from an equilibrium international asset pricing model. The aggregate market-level price delay, which captures the relative speed of adjustment by each aggregate stock market to global common news, is used as an inverse measure of informational efficiency. We find compelling evidence that corroborates the hypothesis that markets that are more integrated with the world market tend to be more efficient as well. We suggest that policy efforts towards market integration and informational efficiency must be complementary as the two policy goals are closely related.

Keywords: stock market integration, informational efficiency, emerging markets, frontier markets, Africa’s stock markets

JEL Classification: F36, G14, G15