Determinants of the Sensitivity of Stock Market Returns in Africa

: A Case Study of Selected Stock Markets in Africa

Abstract

The stock market plays an indispensable role in an economy, serving as a vital mechanism for financing and investment for businesses. The effectiveness of macroeconomic and institutional policies, along with investor sentiment, heavily influences the stock market performance. Nations with robust institutions and strong legal frameworks are better equipped to implement macroeconomic policies effectively, which in turn shapes investor confidence in the stock market. However, heightened economic policy uncertainty can disrupt investors' expectations regarding returns and risks, potentially leading to macroeconomic and financial instability. This study investigates the factors driving stock market returns in Africa from 2009 to 2022, focusing on nine African stock exchanges. It explores macroeconomic factors, institutional qualities, and investor sentiment as independent variables, with stock market returns as the dependent variable. We employed methodologies such as the Granger non-causality test, Bayesian panel regression, and Bayesian moving average. The findings discovered that macroeconomic variable such as taxation, broad money supply, credit to private sector, inflation, exchange rates, GDP growth, and remittances significantly impact stock market returns in Africa. Institutional factors, including corruption control, regulatory quality, rule of law, political stability, and government effectiveness, also play a statistically significant role. The result also revealed that technical analysis, such as weighted moving averages, exponential moving averages, and relative strength index, and fundamental analysis, such as volume of trading, the fear and greed index, and earnings per share, also determine the sensitivity of stock market returns. The study concludes that fostering business-friendly monetary and fiscal policies, alongside transparent governance, sends positive signals to foreign investors, promoting a stable and attractive investment environment.

Date of Award	14 Mar 2025
Original language	English
Awarding Institution	University of Winchester
Supervisor	Richard Werner (Supervisor) & Irfan Sahibzada (Supervisor)