The law of one price: an examination of price integration between Europe and regional markets in Africa

Abstract

This study examines the degree of price-integration of equity indices between the major markets of Africa, namely Morocco, Tunisia, Egypt, Kenya, Nigeria, Namibia and South Africa with the European markets of London and Paris. Vector Autoregressive and Autoregressive Distributed Lag methods reveal that African markets are largely price-segmented. The only markets that are price-integrated have shared economic and financial institutions, such as Namibia and South Africa, and Egypt, Tunisia and France. The evidence suggests that development policy should be focussed on enhancing existing institutions rather than embarking prematurely on regional integration.

Keywords:

• financial market integration
• causality
• Sub-Saharan Africa

JEL Classification::

• C22
• F15
• O16

Notes

¹ The Group of Thirty is the most influential body to encourage the standardization and improvement in global securities administration. Following a symposium in London in March 1989, the following recommendations were agreed: (1) brokers should match trades on day after deal date (T + 1); (ii) trade confirmation on trade day plus 2 days (T + 2); (3) central depository for safe keeping of shares; (4) net basis settlement of cash and stock; (5) settlement takes place as delivery versus payment or receipt versus payment; (6) settlement in same day funds; (7) settlement effected on trade date plus 3 days (T + 3); (8) securities lending should be permitted; (9) international securities numbering system must be adopted (ISIN code).