Electronic copy available at: http://ssrn.com/abstract=1366462 Electronic copy available at: http://ssrn.com/abstract=1366462 Pricing and Valuation in African Equity Markets Bruce Hearn Sir John Cass Business School, and King’s College London Abstract This paper assesses the effectiveness of traded turnover, Amihud (2002) and Liu (2006) metrics in measuring illiquidity, as used in a multifactor CAPM. The performance of this model is contrasted with a simple stochastic drift model on a new sample of all of Africa’s major equity markets: Morocco, Tunisia, Egypt, Kenya, Nigeria, Zambia, Botswana and South Africa, together with London and Paris. Costs of equity are found to be highest in Nigeria and Zambia and lowest in Tunisia, Morocco, Namibia and South Africa’s blue chip stocks. Analysis of portfolio characteristics reveals that investment strategies based on either pan-African or Francophone markets outperform those of Anglophone markets in Africa, despite their lower mean returns. JEL classification: G11, G12, G15, O55 Keywords: Liquidity, Portfolio Diversification, Emerging Financial Markets, Africa * Corresponding author: Department of Management, King’s College London, 150 Stamford St, London SE1 9HN. Tel: 44(0)207 848 4164. Email: jenifer.piesse@kcl.ac.uk 1