Oil price dependency of African stock exchange markets

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Oil!price!dependency!!

of!African!stock!exchange!markets!

Bachelor)Thesis) ! ! ! ! ! ! ! ! ! Tijn%H.P.%Gerards% % % % % % % % 2nd_{%February%2015%} 10202528% % % % % % % % % Bachelor%Thesis% Finance% % % % % % % % % Final%version% Supervisor:%R.%Sperna%Weiland%

Statement%of%Originality% ! ! Statement%of%Originality% ! This!document!is!written!by!Tijn!Gerards!who!declares!to!take!full!responsibility!for!the! contents!of!this!document.% I!declare!that!the!text!and!the!work!presented!in!this!document!is!original!and!that!no! sources!other!than!those!mentioned!in!the!text!and!its!references!have!been!used!in! creating!it.! The!Faculty!of!Economics!and!Business!is!responsible!solely!for!the!supervision!of! completion!of!the!work,!not!for!the!contents.! ! ! ! ! ! ! ! ! ! ! ! ! ! % %

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1. Abstract!

The!aim!of!this!paper!is!to!find!whether!the!development!of!stock!markets!in!Africa!is! dependent!on!the!price!of!oil.!To!investigate!this!a!panel!analysis!has!been!performed!by! using!a!dataset!of!17!African!countries!over!the!period!from!1988!to!2012.!The!full!sample!of! countries!is!divided!into!two!groups:!(1)!netLoil!exporters!and!(2)!netLoil!importers.!Next!to! the!oil!price!index,!several!classical!stock!market!determinants,!together!with! unconventional!determinants!such!as!remittances!and!institutional!quality,!are!regressed!on! the!market!capitalization!of!listed!companies.!The!main!finding!of!this!paper!is!that!there!is! an!oil!price!dependency!for!netLoil!exporting!countries.!For!the!oilLimporting!countries!no! significant!evidence!concerning!an!oil!price!dependency!was!found.!The!results!give!rise!to! policy!recommendations.!For!oilLexporting!countries!we!give!strong!recommendations!to! diversify!their!economies!into!nonLoil!segments.!But!to!obtain!this!goal!the!quality!of! institutions!has!to!improve.! % % % % % % % % % % % %

Table-of-Contents-1.! Abstract!...!3! 2.! Introduction!...!5! 3.! How!does!the!oil!price!affect!stock!market!development!in!Africa?!...!7! 3.1! Theoretical!Framework!...!7! 3.1.1!Financial!development!and!economic!growth!...!7! 3.1.2!Stock!markets!and!economic!growth!...!8! 3.1.3!The!influence!of!oil!on!stock!exchange!markets!...!11! 3.2!Determinants!of!stock!market!development!...!13! 4.! Methodology!...!15! 4.1!Variables!...!15! 4.2!Data!...!18! 4.3!Estimation!method!...!19! 5.! Results!and!discussion!...!21! 6.! Conclusions!and!policy!implications!...!24! Bibliography!...!26! ! ! ! ! !

2.

Introduction-The!world!economy!is!currently!experiencing!a!dramatic!fall!in!the!oil!price1.!Not!only!the! Western!world!is!affected!by!this!turmoil,!but!developing!economies!in!Africa!are!too.! African!countries!account!for!an!increasing!share!of!global!economic!growth.!As!a! consequence!of!these!enhanced!economic!situations,!African!countries!are!urbanizing!and! modernizing.!As!a!result!their!demand!for!oil!is!vastly!increasing.!For!this!reason!oil!is!an! important!factor!in!the!economies!of!oilLimporters!in!Africa.!But,!among!African!countries,! obviously,!the!oilLexporters!are!affected!the!most!by!the!current!turmoil.!These!countries! are!highly!dependent!on!the!export!of!oil,!90%2_{!of!their!total!exports!consist!of!crude!oil.!} (African!Development!Bank!&!African!Union,!2009).!Another!aspect!of!this!dependency!is! that!African!exporters!are,!on!world!scale,!only!small!players.!Therefore,!they!have!little!or! no!influence!on!the!determination!of!the!oil!price.!This!means!that!African!oilLexporters! have!no!other!choice!than!to!accept!the!oil!price!as!a!given.!Furthermore,!Africa’s!oilL importers!are!priceLtakers!too.! Over!the!past!two!decades!the!relationship!between!financial!development!and! economic!growth!has!received!a!great!deal!of!attention.!Especially!interesting!is!relationship! between!stock!market!development!and!financial!development.!Most!attention!on!this! topic!went!to!Latin!America,!NorthernLAmerica,!Europe!and!Asia.!Africa!did!not!receive! considerable!attention.!Because!Africa!is!evolving!into!a!more!important!contributor!to!the! world!economy!this!seems!to!be!illogical.!Furthermore,!the!impact!oil!has!on!stock!markets! has!been!widely!researched,!but!again!only!for!continents!other!than!Africa.! This!paper!will!investigate!whether!the!development!of!stock!markets!in!Africa!is! dependent!on!the!price!of!oil.!This!will!be!done!by!using!a!panel!dataset!of!17!African! countries!for!the!period!of!1988!to!2012.!Because!we!expect!to!find!a!dependency!on!the! price!of!oil!the!results!of!this!research!could!have!policy!implications.!We!aim!to!address! these!implications!by!making!several!policy!recommendations.!Additionally,!this!paper! performs!a!comprehensive!literature!research!to!find!a!complete!set!of!stock!market! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! ! 1_{!The!oil!price!has!more!than!halved!in!value!between!July!2014!and!January!2015.!(Source:!Nasdaq,!} http://www.nasdaq.com/markets/crudeLoil.aspx?timeframe=1y)! 2_{!Taken!all!African!oilLexporting!countries!into!consideration!(not!only!the!countries!in!table!1).!}

determinants.!Not!only!classical!determinants!such!as!income,!investments,!domestic!credit! and!the!value!of!traded!stocks!have!been!found!but!unconventional!determinants!such!as! institutional!quality!and!remittances!are!found!too.!But,!in!contrast!to!what!theory! suggested,!significant!explanatory!power!for!these!unconventional!determinants!has!not! been!found.! The!structure!of!this!paper!will!be!as!follows.!Section!3!provides!a!comprehensive! literature!study!on!the!theoretical!reasoning!behind!the!relationship!between!the!price!of! oil!and!the!development!of!Africa’s!stock!markets.!In!section!4,!the!data!and!estimation! procedure!will!be!explained.!In!section!5,!the!regression!results!will!be!presented!and! described!followed!by!the!conclusion!and!policy!implications.!! ! ! ! ! ! ! ! ! ! ! ! ! !

3.

How-does-the-oil-price-affect-stock-market-development-in-

Africa?-3.1 Theoretical-Framework- 3.1.1-Financial-development-and-economic-growth-At!the!beginning!of!the!20th!century,!the!first!papers!on!the!potential!link!between!financial! development!and!economic!growth!have!been!written.!The!first!to!write!about!this!relation! was!Schumpeter!(1911).!He!argued!that!the!services!that!are!provided!by!financial! intermediaries!such!as!banks!are!essential!for!economic!and!technological!development.!He! suggests!that!a!developed!financial!system,!with!institutions!for!providing!credit!to!the! people,!is!necessary!for!an!economy!to!grow.!Levine!(1996)!concludes!that,!even!though!the! theoretical!reasoning!behind!Schumpeter’s!theory!is!not!entirely!conclusive,!it!does!suggest! a!positive!relationship!between!financial!development!and!economic!growth.!Several!crossL country!investigations!provide!us!with!empirical!evidence!that!Schumpeter’s!theory!is! correct!(King!&!Levine,!1993).!Recently,!his!theory!has!been!investigated!by!several!authors! for!different!emerging!regions!and!countries.!Bittencourt!(2011)!finds!evidence!for!Latin! America!and!Enisan!&!Olufisayo!(2009)!find!comparable!results!for!Côte!d’Ivoire,!Kenya,! Nigeria,!South!Africa!and!Zimbabwe.! To!measure!financial!development,!several!indicators!have!been!used:!the!ratio!of! liquid!liabilities!to!GDP!(M2),!which!can!be!seen!as!a!measure!of!market!size,!issued! domestic!credit!to!private!firms!over!bank!deposits,!which!can!be!seen!as!a!measure!of! market!activity!(King!&!Levine,!1993),!and!stock!market!capitalization!as!a!share!of!GDP,! which!can!be!seen!as!a!measure!of!stock-market-development!(Bittencourt,!2012).!Strong! correlations!have!been!found!between!the!indicators!of!financial!development!and!overall! economic!growth.!But,!Levine!&!Zervos!(1996)!find!that!stock!market!development!on!its! own!is!robustly!correlated!with!increased!economic!growth.!The!knowledge!that!financial! development!has!significant!beneficial!effects!on!economic!growth!can!be!seen!as!a!positive! development.!However,!Bittencourt!(2012)!comments!that!a!specific!‘instruction!manual’!on! how!to!rightfully!increase!financial!development!does!not!exist.! ! ! !

3.1.2-Stock-markets-and-economic-growth-Stock!market!development!has!beneficial!effects!on!economic!growth!along!several!lines,! being:!liquidity,!diversification!and!information.! Firstly,!stock!markets!can!affect!economic!activity!by!providing!liquidity!to!investors.! Liquidity!creates!a!more!attractive!investment!climate!because!investors!do!not!have!to! commit!to!longLterm!investments!(DemirgücLKunt!&!Levine,!1996).!Savers!will!be!more! willing!to!invest!their!savings!when!investing!becomes!less!risky.!A!stock!market!mechanism! makes!investing!more!attractive!and!less!risky!as!they!allow!investors!to!buy!and!sell!quickly! when!needed.!Basic!economic!theory!tells!us!that!investors!want!to!maximize!returns!while! minimizing!risk.!Stock!markets!allow!investors!to!efficiently!allocate!their!capital.!For!these! reasons!stock!markets!create!significant!sources!of!capital!to!the!corporate!sector!(Osinubi! &!Amaghionyeodiwe,!2003).! Secondly,!stock!markets!create!possibilities!of!investment!diversification.!It!is!argued! that!investors!would!rather!invest!in!countries!that!have!a!stock!exchange!market!than!in! countries!that!do!not.!For!this!reason!stock!exchange!markets!will!help!to!prevent!missing! out!on!investments!(Osinubi!&!Amaghionyeodiwe,!2003).!Furthermore,!Obstfeld!(1994)! argues!that!because!highLreturn!investments!are!relatively!risky,!the!choice!for!higherL return!projects!is!encouraged!when!risk!diversification!is!facilitated.!One!of!the!conditions! for!risk!diversification!is!an!internationally!integrated!stock!market.!International!integration! of!a!stock!market!is!the!rate!at!which!stock!markets!from!different!parts!of!the!world!are! interdependent.!! Finally,!another!effect!of!stock!market!development!is!the!effective!consummation! of!information.!The!possibility!of!profiting!from!trading!on!a!stock!market!creates!incentives! for!investors!to!research!and!monitor!firms.!More!widely!available!information!will!improve! the!allocation!of!capital!and!accelerate!economic!growth!(Osinubi!&!Amaghionyeodiwe,! 2003).!Furthermore,!Jones!&!Kaul!(1996)!found!that!the!reaction!of!stock!markets!can!be! completely!addressed!to!the!effects!on!current!and!expected!future!cash!flows.! However,!other!views!concerning!the!effects!of!stock!market!development!do!exist.! Increased!stock!market!liquidity!can!reduce!saving!rates!because!of!substitution!and!income! effects,!which!in!turn!have!the!potential!to!slow!down!economic!growth.!Furthermore,! when!investing!becomes!less!risky,!it!could!cause!a!lower!demand!for!precautionary!savings!

(DemirgücLKunt!&!Levine,!1996).!Additionally,!Hoogduin!(2012)!explains!that!a!strong! international!relation!of!the!financial!system!has!a!direct!negative!effect!on!systematic!risk.! 3.1.2.1!Africa! Especially!for!Africa,!scientists!have!strongly!focused!on!stock!market!development.!Ngare! et!al!(2014)!investigated!the!link!between!stock!market!development!and!economic!growth! in!Africa.!They!found!that!the!development!of!a!stock!market!plays!a!central!role!in! economic!performance!for!African!countries!and!that!countries!with!stock!markets!are!likely! to!grow!faster!than!countries!that!do!not!(Ngare,!Morekwa!Nyamongo,!&!Misati,!2014).! Furthermore,!several!case!studies!have!been!done!that!confirm!the!strong!link!between!the! development!of!a!stock!market!and!longLrun!growth!(Osinubi!&!Amaghionyeodiwe,!2003)! Figure!1!shows!that!on!average!the!GDP!growth!rate!of!African!countries!with!a!stock! exchange!market!is!4.24%!while!the!growth!rate!for!African!countries!that!do!not!is!only! 3.43%3_{.!Besides!a!higher!growth!rate!on!average,!figure!2!shows!that!average!GDP!per!} capita!(constant!US$,!2005)!in!countries!with!stock!markets!is!1.5!times!higher!than!in! countries!without!stock!markets.!Additionally,!we!see!that!average!GDP!per!capita!in! countries!with!stock!markets!has!almost!doubled,!while!we!only!see!a!slight!increase!for! countries!without!one.!! The!benefits!of!stock!market!development!in!Africa!have!been!in!line!with!their! common!role!in!the!development!process!of!emerging!economies!(Osinubi!&! Amaghionyeodiwe,!2003).!Furthermore,!literature!shows!that!regionLspecific!beneficial! effects!of!stock!market!development!exist!too.!A!final!beneficial!effect!of!stock!market! development!on!economic!growth!for!countries!in!Africa!is!that!they!create!incentives!for! privatization!of!public!institutions.!A!typical!characteristic!of!developing!countries!is!the! great!size!of!their!public!sector.!After!most!African!countries!became!independent!from! colonial!rule!in!the!1960s,!effort!was!put!into!speeding!up!economic!growth.!Most!countries! saw!a!solution!in!government!intervention.!Because!provision!of!credit!was!seen!as!the!key! to!economic!development,!the!banking!system!was!nationalized.!This!resulted!in!inefficient! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! ! 3_{!The!group!of!African!countries!without!stock!markets!comprises:!Angola,!Benin,!Burkina!Faso,!Burundi,!} Central!African!Republic,!Chad,!Comoros,!Dem.!Rep.!Congo,!Rep.!Congo,!Djibouti,!Eritrea,!Ethiopia,!Gabon,! Gambia,!Guinea,!Lesotho,!Liberia,!Mali,!Mauritania,!Niger,!Sao!Tome!and!Principe,!Senegal,!Sierra!Leone,! SouthLSudan,!Togo.!

resource!allocation!and!the!government!absorbing!banking!losses!(Gelbard!&!Leite,!1999).! These!inefficient!outcomes!resulted!not!only!in!a!relatively!low!economic!growth!but! facilitated!fraud!and!corruption!too!(Gelbard!&!Leite,!1999).!Hence,!nationalizing!institutions! did!not!have!the!desired!effect.!The!development!of!stock!markets!also!relates!to!the! privatization!of!stateLowned!companies!allowing!for!an!increase!in!economic!growth! (Osinubi!&!Amaghionyeodiwe,!2003).!Stock!markets!can!serve!as!an!instrument!for! privatization!that!will!cause!benefits!along!two!lines.!First,!privatization!positively!affects!the! economy!in!terms!of!efficient!operation!of!the!privatized!enterprises,!but,!secondly,!it! relieves!the!government!budget.!If!privatization!had!not!taken!place!on!a!stock!market,!it! would!have!only!benefited!‘the!lucky!few’!(Osinubi!&!Amaghionyeodiwe,!2003).! ! ! ! ! ! ! ! ! ! ! L4! L2! 0! 2! 4! 6! 8! 10! 1988! 1990! 1992! 1994! 1996! 1998! 2000! 2002! 2004! 2006! 2008! 2010! 2012! Gro wt h%p ercen ta ge%

Average%GDP%Growth%(%,%annual)%

GDP!growth!of!African! countries!with!a!stock! market!(period! averages:!4.24%)! GDP!growth!of!African! countries!without!a! stock!market!(period! averages:!3.43%)! Fig.%1% Source:! World!Bank!Development! Indicators.! 0! 500! 1000! 1500! 2000! 2500! 3000! 1988! 1990! 1992! 1994! 1996! 1998! 2000! 2002! 2004! 2006! 2008! 2010! 2012!

GDP%per%capita%(US$,%constant%2005)%

GDP!per!capita!of! African!countries!with!a! stock!market! GDP!per!capita!of! African!countries! without!stock!markets! Fig.%2% Source:! WorldBank!Development! Indicators.!

Important!to!note!is!that!not!all!earlier!mentioned!effects!of!stock!market! development!are!applicable!to!Africa.!AgyeiLAmpomah!(2011)!finds!that!African!countries! can!probably!not!benefit!from!risk!diversification!because!their!stock!markets!are!not!yet! internationally!integrated.!Hence,!the!interdependencies!of!African!stock!markets!fall!solely! into!regional!blocks.!Additionally,!the!above!mentioned!contending!voice!of!reduced!savings! is!mainly!a!topic!of!concern!for!more!developed!economies.!Africa!is!not!expected!to! experience!a!reduction!in!savings!because!the!money!simply!is!not!there!(Osinubi!&! Amaghionyeodiwe,!2003).! 3.1.3-The-influence-of-oil-on-stock-exchange-markets-The!influence!of!oil!on!developed!stock!markets!has!been!widely!investigated.!Hamilton! (1983)!argues!that!the!oil!price!can!affect!market!activity!along!two!lines.!An!increase!in!the! price!of!oil!has!effects!on!both,!the!demand!and!the!supply!side.!Fluctuations!in!the!oil!price! could!affect!basic!production!and!the!costs!of!investment,!this!is!called!the!supply!side! effect.!But,!a!fluctuation!may!also!affect!the!terms!of!trade,!a!company’s!production! structure,!unemployment!rate!and!consumer!demand.!These!sides!of!the!consequences!of! oil!price!changes!are!known!as!the!demandLside!effect!(Hamilton,!1983).!Arouri!et!al.!(2011)! found!empirical!evidence!for!a!reverse!causality!between!increases!in!the!oil!price!and!the! development!of!stock!markets!in!Europe.!!They!mainly!associate!increases!in!the!oil!price! with!positive!effects!on!economies.!These!effects!are!higher!expected!economic!growth!and! increased!investor!and!consumer!confidence.!Because!stock!markets!are!more!efficient!than! real!markets!and!are!very!sensitive!to!news,!it!is!expected!that!oil!price!fluctuations!are! quickly!reflected!into!stock!prices!(Arouri,!Foulquier,!&!Fouquau,!2011).! Again!Africa!received!little!attention.!Among!the!few!empirical!papers!concerning! the!link!between!oil!price!and!stock!market!development!in!emerging!economies,!Basher!&! Sadorsky!(2006)!investigated!the!link!between!the!oil!price!and!stock!markets!by!focusing!on! a!large!group!of!emerging!economies.!They!found!strong!evidence!for!a!relationship! between!fluctuations!in!the!price!of!oil!and!stock!market!development!in!the!investigated! countries.!More!specifically,!Billmeier!&!Massa!(2009)!found!that!for!oilLexporting!countries! in!the!Middle!East!and!North!Africa!stock!markets!are!mainly!driven!by!the!oil!price.!An! important!difference!between!Billmeier!&!Massa!(2009)!en!this!research!is!that!they! investigated!the!region!with!the!biggest!oilLexporters!in!the!world.!These!countries!are!

important!players!in!determining!the!oil!price:!they!influence!the!determination!of!the!oil! price!greatly.!Because!oilLexporting!countries!in!Africa!are!relatively!small!players!they!are! priceLtakers.!This!suggests!that!their!dependency!on!the!oil!price!should!even!be!higher! because!they!cannot!exert!influence!on!the!value!of!the!oil!price.!Africa’s!largest!oilL producer,!Nigeria,!‘only’!contains!3.1%!of!the!known!worldwide!oil!reserves,!while!for! example!Saudi!Arabia!contains!22%4_.! ! However,!Africa’s!economies!did!not!get!specific!attention.!Africa’s!largest!energy! source!is!oil,!which!covers!40.9%!of!the!total!energy!consumption.!Oil!is!followed!by!gas! with!a!consumption!share!of!20.3%!(African!Development!Bank!&!African!Union,!2009).!As! African!countries!are!urbanizing!and!modernizing!against!a!relatively!high!growth!rate!their! demand!for!oil!will!increase!significantly!(Basher!&!Sadorsky,!2006).!Figure!3!shows!this! significant!increase!of!oil!consumption!in!Africa!for!the!period!1965L2006,!the!consumption! has!more!than!quintupled.!Looking!at!this!demandLgrowth!together!with!the!high!volatility! of!the!oil!price,!as!we!are!currently!experiencing,!the!issue!of!the!effect!oil!has!on!Africa’s! stock!markets!can!provide!us!with!valuable!information.!OilLexporting!countries!in!Africa!are! highly!dependent!on!their!oil!exports,!90%!of!their!total!exports!is!crude!oil!(African! Development!Bank!&!African!Union,!2009).!Uchem!(2010)!argues!that!oilLexporting! countries!are!responsible!for!their!own!oil!dependency.!Because!of!the!ease!of!oil!revenues! other!market!segments,!such!as!the!agricultural!sector,!are!neglected.!Further!he!argues! that!the!revenues!from!oil!are!not!spent!in!a!way!that!is!beneficial!to!the!development!of! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! ! 4_{!http://www.opec.org/opec_web/en/data_graphs/330.htm!} Fig.%3% Africa’s%daily% consumption%of%crude% oil.% Source:!BP,!2008!

these!countries.!Wang,!Wu!&!Yang!(2013)!found!confirming!empirical!evidence!for!the! expectation!that!oilLimporting!countries!react!differently!from!oilLexporting!countries!on! changes!in!the!oil!price.!Behmiri!&!Pires!Manso!(2013)!explain!that!developing!netLoil! importing!countries!should!in!theory!be!affected!more!by!oil!price!fluctuations!than! developed!countries.!Direct!effects!of!oilLimporters!to!an!oil!price!increase!are!instant! changes!in!the!costs!they!have!to!bear!when!purchasing!oil.!Indirectly,!an!increase!could! have!a!negative!effect!on!production!and!employment.!These!developing!oilLimporters!are! thought!of!as!being!less!efficient!in!their!use!of!energy!and,!obviously,!they!are!dependent! on!imports!(Behmiri!&!Pires!Manso,!2013).!For!netLoil!exporters!a!positive!and!significant! estimate!for!the!price!of!oil!is!expected.!If!the!price!of!oil!increases!this!does!not!affect!the! costs!of!oil!production,!as!a!consequence!a!direct!effect!on!the!profits!from!oil!endowments! should!be!found.!Furthermore,!a!high!volatility!of!the!oil!price!has!an!effect!on!both,! importers!and!exporters!because!it!lowers!the!predictability!of!the!marginal!costs!of! production!for!companies.!This!lowered!predictability!can!have!job!cuts!and!reduced! investments!as!a!consequence.!Additionally,!Brückner!&!Ciccone!(2010)!found!evidence!for! an!increased!likelihood!of!civil!wars!in!Africa!when!the!oil!price!decreases!for!oil!exporting! countries.!Concluding,!we!expect!that!the!reactions!on!oil!price!changes!vary!significantly! between!netLoil!importers!and!netLoil!exporters.! 3.2-Determinants-of-stock-market-development-To!perform!a!correct!empirical!analysis!in!this!section!the!determinants!of!stock!market! development!will!be!discussed.!What!determines!the!development!of!a!stock!market!does! not!only!depend!on!whether!a!country!is!developed!or!emerging,!region!specific! determinants!have!a!role!in!this!too.!Most!determinants!of!stock!market!development!are!of! macroeconomic!and!institutional!nature.!Most!variables!that!will!be!used!in!the!regression! analysis!are!classical.!They!include!measures!for!income,!investment,!inflation!change,! domestic!credit!and!value!of!traded!stocks!(Yartey,!2010;!Billmeier!&!Massa,!2009).!!These! determinants!are!discussed!more!briefly!in!the!methodology!chapter.! Because!comprehensive!literature!study!revealed!there!could!be!more!aspects!to! determining!stock!market!development,!these!findings!will!be!introduced!here:!institutions! appear!to!be!of!high!importance!for!stock!market!development!in!emerging!economies.!

Institutions!can!be!interpreted!as:!‘The-set-of-rules-and-norms-that-shape-the-social,-political- and-economic-interactions-among-the-members-of-a-society,-or-as-organizational-institutions-such-as-political,-economic,-social-and-educational-bodies-(Billmeier!&!Massa,!2009)’.!Several! researchers!underscore!the!valuable!impact!institutions!of!high!quality!have!on!the! development!of!stock!exchange!markets.-Barry!&!Tacneng!(2014)!empirically!investigated! the!impact!of!institutional!quality!on!financial!performance!in!Africa.!They!found!that!three! aspects!of!institutional!quality!are!most!important:!government!effectiveness,!rule!of!law! and!information!sharing.!As!is!argued!by!Pistor!et!al.!(2010)!the!effectiveness!of!legal! institutions!covers!a!large!proportion!of!the!foundations!of!institutional!quality.!!An!effective! rule!of!law!can!create!incentives!for!banks!to!provide!more!credit!to!borrowers!that!will! stimulate!investments!with!stock!market!development!as!a!consequence!(Barry!&!Tacneng,! 2014).!Transparency,!which!is!one!of!the!factors!of!information!sharing,!is!found!to!be!a! factor!that!can!drastically!change!sentiment!among!investors!in!a!way!that!supports!stock! market!development!(Pagano,!1993).!Partially,!this!change!in!sentiment!can!be!attributed!to! another!consequence!of!increasing!institutional!quality.!Accompanied!with!such!an!increase! it!is!found!that!the!volatility!of!equity!returns!is!often!reduced,!which!will!in!turn!attract!new! investors!(Jayasuriya,!2005).!Finally,!Billmeier!&!Massa!(2009)!make!use!of!the!Heritage’s! Foundation’s!Index!of!Economic!Freedom!as!an!indicator!of!institutional!quality.! ! Remittances!are!an!example!of!region!specific!determinants!of!stock!market! development.!Remittances!are!transfers!of!money!by!a!foreign!worker!to!an!individual!in!his! or!her!home!country.!In!their!paper!Billmeier!&!Massa!(2009)!argue!that!received! remittances!play!a!significant!role!in!the!financial!development!of!MENA!countries5_.!This!is! confirmed!by!Aggarwal!et!al.!(2006)!who!tested!the!effect!of!remittances!on!financial! development!among!99!emerging!economies.!Gupta!et!al.!(2009)!found!a!comparable!result! for!Africa:!received!remittances!are!stable!private!transfers!of!capital!that!have!various! effects!on!African!economies.!These!effects!manifest!themselves!by!a!direct!reduction!of! poverty,!increased!household!spending,!increased!savings,!provision!of!working!capital!and! the!encouragement!of!entrepreneurship.!As!already!mentioned,!when!liquid!instruments! are!available!such!as!stock!markets,!people!are!more!likely!to!use!their!savings!for!investing! which!will!result!in!increased!economic!growth.! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! ! 5_{!Middle!Eastern!&!NorthLAfrican!(MENA)!countries.!}

4.

Methodology-As!mentioned!above,!the!group!of!African!countries!with!a!stock!exchange!market6!is! divided!in!two!different!groups:!(1)!net!oilLimporters!and!(2)!net!oilLexporters.!The!net!oilL importers!are:!Botswana,!Ghana,!Kenya,!Malawi,!Mauritius,!Morocco,!Namibia,!South!Africa,! Swaziland,!Tanzania,!Uganda,!Zambia!and!Zimbabwe.!The!other!group!comprises!Cote! d’Ivoire,!Egypt,!Nigeria!and!Tunisia7_{.!The!full!sample!is!divided!based!on!net!exports!because!} different!results!are!expected!for!net!importers!and!net!exporters.!Both!groups!have! different!characteristics!when!it!comes!to!fluctuations!in!the!oil!price.!Importers!are! dependent!on!imports!and!a!fluctuation!in!oil!price!has!a!direct!effect!on!the!costs!they!have! to!endure!when!purchasing!oil.!Exporters!are!dependent!on!the!amount!of!exports;!a! change!in!the!price!of!oil!(all!else!equal)!has!direct!effects!on!profits!because!production! costs!do!not!change.!A!panel!data!regression!will!be!performed!on!both,!the!netLoil! exporters!and!the!netLoil!importers,!with!a!measure!of!stock!market!development!as!the! dependent!variable!and!the!oil!price!index!as!our!main!variable!of!interest.!Other! explanatory!variables!will!be!the!stock!market!determinants!that!are!found!in!the!literature! review.!We!expect!to!find!a!positive!and!significant!coefficient!for!the!price!of!oil!for!the!netL oil!exporters!and!to!find!a!negative!and!significant!coefficient!for!the!price!of!oil!for!the!netL importers.! 4.1-Variables-To!test!whether!the!price!of!oil!has!a!significant!impact!on!the!development!of!stock! exchange!markets,!we!regress!a!proxy!of!the!oil!price!together!with!other!stock!market! determinants!on!the!market!capitalization!of!listed!companies!as!a!share!of!GDP8_.! Different!options!are!available!for!measuring!the!development!of!a!stock!exchange!market! (dependent!variable).!Market!capitalization!relative!to!GDP,!the!number!of!listed! companies,!and!changes!in!stock!market!index!are!all!examples!of!how!stock!market! development!can!be!measured.!In!this!paper,!market!capitalization!relative!to!GDP!will!be! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! ! 6_{!The!countries!that!have!a!stock!market!too!are:!Algeria,!Cameroon,!Cabo!Verde,!Libya,!Mozambique,!} Rwanda,!Seychelles,!Somalia!and!Sudan.!After!visiting!all!stock!market!websites!the!conclusion!is!no!sufficient! information!is!available.! 7_{!See!Table!1!for!the!calculations!behind!this!division.!} 8_{!All!data!comes!from:!The!World!Bank!Group,!World!Bank!Development!Indicators;!IMF,!International!} Financial!Statistics;!Heritage!Foundation,!Index!of!Economic!Freedom!2014.!

used!because!this!measure!is!the!most!used!measure!of!stock!market!development!in!other! empirical!papers9_{.!The!log!of!market!capitalization!will!be!used!to!scale!the!data.!!} Because!large!differences!exist!(see!Table!2)!between!market!capitalizations!among!the! countries!that!will!be!investigated!it!is!necessary!to!scale!them!by!using!the!natural! logarithm10.! ! ! ! ! ! ! ! ! The!main!variable!of!interest!is!the!oil!price!index!(OPI).!As!a!proxy!for!the!oil!price! we!include!an!index!that!is!established!by!averaging!the!prices!of!Brent,!Texas!West! Intermediate!and!Dubai!oil,!real!USD$!(2010)11.!As!mentioned!above!the!OPI!will!be!included! to!be!able!to!prove!whether!the!development!of!stock!markets!in!Africa!is!dependent!on!the! development!of!the!price!of!oil.!If!we!find!that!the!oil!price!contributes!significantly!to!the! development!of!stock!markets!this!might!give!rise!to!political!and!economic!implications.!! Institutions!and!remittances!have!been!mentioned!and!explained!earlier.!As!a!proxy! for!institutions!the!Heritage!Foundation’s!Index!for!Economic!Freedom!(2014)!will!be!used.! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! ! 9_{!(Yartey,!2010)!(Billmeier!&!Massa,!2009)!(Ngare,!Morekwa!Nyamongo,!&!Misati,!2014)!} 10_{!All!comparable!papers!use!the!log!of!market!capitalization.!(see!footnote!9!for!references)!} 11_{!This!index!is!used!because!the!prices!of!the!three!different!oils!are!highly!correlated!but!not!1.!Other!papers!} recommend!using!the!average!to!be!sure!that!we!find!realistic!estimates!(Billmeier!&!Massa,!2009).!!

Countries% Exports% Imports% Net%exports%

Botswana% 0.20%! 12.07%! [11.87%% Cote%d'Ivoire% 29.22%! 25.07%! 4.15%% Egypt,%Arab%Rep.% 40.11%! 6.91%! 33.20%% Ghana% 9.48%! 12.65%! [3.17%% Kenya% 9.44%! 19.67%! [10.23%% Malawi% 0.14%! 11.41%! [11.28%% Mauritius% 0.24%! 11.93%! [11.68%% Morocco% 2.44%! 17.52%! [15.08%% Namibia% 0.86%! 8.26%! [7.39%% Nigeria% 94.37%! 3.07%! 91.30%% South%Africa% 9.62%! 13.08%! [3.46%% Swaziland% 0.78%! 11.20%! [10.42%% Tanzania% 0.87%! 18.77%! [17.91%% Tunisia% 12.58%! 10.31%! 2.26%% Uganda% 2.41%! 14.80%! [12.39%% Zambia% 1.26%! 11.03%! [9.78%% Zimbabwe% 2.82%! 14.99%! [12.17%% Table%1% Division%between%net[ exporting%and%net[importing% countries%in%Africa% Source:!World!Bank!Development! Indicators,!IMF!(IFS).! (Exports!&!imports!are!given!as!%! of!total!exports)! !

The!index!is!the!only!freely!available!measure!for!institutional!quality!and!has!been!used! frequently!in!other!papers!(Billmeier!&!Massa,!2009).!This!index!contains!10!equallyL weighted!components:!property!rights,!freedom!from!corruption,!fiscal!freedom,! government!spending,!business!freedom,!labor!freedom,!monetary!freedom,!trade! freedom,!investment!freedom!and!financial!freedom.!The!Heritage!Foundation!gives! countries!an!annual!score12_{!on!every!aboveLmentioned!facet.!Remarkable!about!the!data!} from!the!Heritage!Foundation!is!that!during!our!sample!period!no!noteworthy!increase!(or! decrease)!in!institutional!quality!took!place13.!Recently,!remittances!are!thought!of!as!having! a!beneficial!effect!on!the!development!of!stock!markets.!Remittances!are!measured!by! looking!at!received!remittances!as!a!share!of!GDP.!Data!is!found!in!databank!of!the!World! Bank,!the!used!database!is!World!Development!Indicators.! ! Income!is!used!as!an!explanatory!variable!because!income!is!known!to!be!highly! correlated!with!stock!market!size!(in!this!sample!the!correlation!between!market! capitalization!and!income!is!0.8467).!Income!is!measured!as!GDP!in!constant!2005!US$.! Changes!in!income!can!be!viewed!at!as!the!expansion!of!a!country’s!economy.!Accompanied! with!expansion,!the!demand!of!an!economy!for!financial!services!increases,!for!this!reason!it! is!necessary!to!include!income!in!the!model!(Yartey,!2010).!Table!2!shows!us!that!the! minimum!value!of!income!is!US$!1.3!billion!and!the!maximum!is!US$!330!billion.!For!this! reason!the!log!of!income14_{!is!used!to!scale!the!data.!!} ! Stock!markets!serve!as!an!instrument!to!intermediate!savings!into!investment! projects!(liquidity!function).!In!short,!stock!markets!are!associated!with!high!levels!of! liquidity!that!could!create!incentives!for!people!to!turn!savings!into!investments15_.!For!this! reason!the!expectation!is!that!investments!are!an!important!determinant!of!stock!market! development.!Investments!are!measured!as!the!gross!fixed!capital!formation!(domestic!and! foreign)!and!changes!in!inventories!and!acquisitions.! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! ! 12_{!Scores!are!in!between!1(low)!and!100!(high).!} 13_{!None!of!the!investigated!countries!shifted!5.0!points!or!more!on!its!score!(some!even!experienced!a!} decrease!in!their!score).! 14_{!All!comparable!papers!use!the!log!of!income!(see!footnote!9!for!references).!} 15_{!In!theoretical!framework!chapter!the!contribution!of!investments!to!stock!market!development!is!explained!} more!briefly.!

! Domestic!credit!(as!a!share!of!GDP)!serves!as!a!measure!for!banking!sector! development.!A!good!developed!banking!sector!facilitates!stock!markets!and!spurs! economic!growth!(Schumpeter,!1911).!As!mentioned!above,!his!theory!has!been!confirmed! by!several!empirical!analyses.!Domestic!credit!refers!to!financial!resources!provided!to!the! private!sector!by!financial!corporations.!Examples!of!the!credit!provision!are!the!issuance!of! loans,!purchases!of!nonLequity!securities!and!other!accounts!receivable,!an!important! condition!is!that!they!all!generate!a!claim!for!repayment.! ! Total!value!of!stocks!traded!(as!a!share!of!GDP)!refers!to!the!total!value!of!shares! traded.!The!reason!for!adding!this!variable!to!the!model!is!that!it!reflects!the!level!of! liquidity!of!a!stock!market!(Yartey,!2010).!Furthermore!it!complements!the!market! capitalization!ratio!by!showing!whether!the!level!of!trade!matches!market!size.! ! As!it!is!important!to!add!a!measure!of!macroeconomic!stability,!inflation!change-is! included!in!the!model.!Inflation!change!serves!two!purposes,!it!measures!macroeconomic! stability!and!for!certain!countries!in!the!sample!it!serves!as!a!correcting!factor16.!To!measure! inflation!change!the!second!difference!of!the!CPILindex!has!been!used.!We!expect!that! inflation!change!will!have!a!significant!yet!negative!effect!on!stock!market!development.!If! inflation!changes!are!high!this!will!increase!the!degree!of!uncertainty!on!stock!exchanges! causing!decreased!incentives!for!people!to!trade!in!equity!(Yartey,!2010).! The!aboveLmentioned!explanatory!variables!will!be!taken!together!in!a!vector!!!".! The!complete!model!will!look!like!this:! !_!" = !_! + !_!!"#_!"+ !_!!"#$_!"+ !_!!"#_!"+ !_!!_!"+!!_!"17_! 4.2-Data-The!databases!of!the!World!Bank!and!the!International!Monetary!Fund!provided!data!for!a! period!from!1988!to!2012.!The!sample!consists!of!countries!that!had!to!fulfill!two! requirements:!(1)!have!a!stock!exchange!market!and!(2)!data!about!these!stock!markets!had! to!be!available.!Unfortunately,!some!African!countries!did!not!have!sufficient!published! information!available!about!their!stock!exchanges!(see!footnote!6).!Descriptive!statistics! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! ! 16_{!E.g.!Zimbabwe!experienced!several!periods!of!hyperinflation!that!dramatically!affected!their!market!} capitalization!in!US$,!the!inclusion!of!inflation!change!is!then!serving!as!a!correcting!factor!(Coomer!&! Gstraunthaler,!2011).! 17_{!Subscript!i!and!t!explain!that!panelLdata!is!used;!(i=country;!t=time).!}

(table!2a)!show!us!big!differences!in!the!levels!of!market!capitalization!between!exporters! and!importers.!It!is!important!to!note!that!when!the!importers!would!be!corrected!for!South! Africa18_{!and!Zimbabwe!(see!footnote!16)!the!highest!market!capitalization!would!have!been!} observed!in!the!netLoil!exporting!group!(table!2b).!Other!notable!conditions!in!our!data!can! be!addressed!to!a!higher!average!income!of!oilLexporting!countries.!Income!is!measured!as! real!GDP!in!US$!billions!(see!table!2,!note!d)!and!variables!such!as!remittances,!income,! market!capitalization,!domestic!credit!and!stocks!traded!are!measured!as!a!share!of!GDP.!! This!note!is!only!important!when!analyzing!the!descriptive!statistics!as!our!model!corrects! for!these!observations.! 4.3-Estimation-method-Given!the!nature!of!our!dataset!(time;!country)!a!panel!analysis!technique!will!be!used!to! estimate!the!regression.!The!main!variable!of!interest!(OPI)!will!be!regressed!together!with!a! vector!(!!")!of!other!stock!market!determinants!on!the!market!capitalization!as!a!share!of! GDP.!The!results!of!the!panel!analysis!will!be!used!to!draw!a!conclusion!on!whether!stock! market!development!in!Africa!is!influenced!by!the!oil!price.!To!be!able!to!make!a!correct! estimation!with!this!data,!several!tests!have!to!be!performed!(Princeton!University,!2007).! All!three!groups!(netLoil!exporters,!netLoil!importers,!full!sample)!will!be!tested!on!whether! to!use!fixedL!or!randomLeffects.!Princeton!University!(2007)!explains!that!to!test!on!fixedL!or! randomLeffects!a!Hausman!test!must!be!performed.!The!Hausman!test!is!a!test!in!which!two! estimators!are!tested!on!differences!(Stata!Corporation).!The!nullLhypothesis!states!that! random!effects!should!be!used19.!How!to!test!on!whether!to!use!heteroscedastic!standard! errors!or!not!depends!on!the!outcome!of!the!HausmanLtest.!When!the!null!is!rejected!(use! fixedLeffects)!a!WaldLtest!should!be!performed!for!testing!on!heteroscedasticity.!If!we!do! not!reject!the!null!(use!randomLeffects)!we!use!a!substitute!for!the!WaldLtest!because!this! test!is!only!allowed!to!use!for!fixedLeffects.!The!nullLhypothesis!of!the!WaldLtest!is!using! homoscedastic!standard!errors.! ! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! ! 18_{!South!Africa!is!an!economic!exception!when!looking!at!Africa.!} 19_{!When!the!HausmanLtest!is!not!rejected!this!means!that!the!use!of!fixedLeffects!would!still!give!consistent!} estimates,!but,!the!use!of!randomLeffects!is!more%efficient.!

Table-2a-African%economies%with%a%stock%market:%descriptive%statistics%for%regression%variables,%1988[2012.% Table-2b-Descriptive%statistics%excluding%South%Africa%and%Zimbabwe,%1988[2012.% % Source!of!table!2a!&!2b:!World!Bank!Development!Indicators!&!IMF,-International-Financial-Statistics!(IFS)!and!authors’!calculations.% Variable!explanation!of!table!2a!&!2b:! a) Market!capitalization!as!a!share!of!GDP.! b) Institutional!quality!corresponds!to!the!score!of!the!Heritage!Foundation!Index.! c) Remittances!are!measured!as!(received)!workers’!remittances!over!GDP.! d) Income!is!measured!as!real!GDP!(2005)!in!US$!billions.! e) Investment!corresponds!to!the!gross!fixed!capital!formation!over!GDP.! f) Domestic!credit!is!measured!as!domestic!credit!over!GDP.! g) Stocks!traded!correspond!to!the!total!value!of!traded!stocks!over!GDP.!! ! The!substitute!we!use!when!notLrejecting!the!Hausman!test!is!the!WooldridgeLtest!(Stata! Corporation,!2003).!The!null!of!this!test!is!using!homoscedastic!standard!errors!(Princeton! University,!2007).!The!outcomes!of!all!tests!are!summarized!in!table!3,!in!words:!for!the!netL oil!exporting!countries!a!fixed–effects!panel!analysis!with!homoscedastic!standard!errors! will!be!performed!and!for!the!full!sample!and!netLoil!importing!countries!randomLeffects! will!be!used!with!heteroscedastic!standard!errors.! Table%3;%STATA!results!for!tests!on!random!&!fixed!effects!and!heteroscedasticity! !

Net$oil(exporters Net$oil(importers All(countries

Variable Mean S.D. Min Max Mean S.D. Min Max Mean S.D. Min Max

Market0capitalization 17.94 17.55 3.75 106.75 37.47 52.32 0.5 291.28 33.24 52.01 0.5 487.82 Institutions 55.37 4.14 45.7 63.9 58.92 8.45 21.4 77 58.07 7.78 21.4 77 Remittances 4.01 3.14 0.01 14.58 2.03 2.63 0 15.75 2.58 2.91 0 15.75 Income 52.97 40.183 13 170 27.41 58.53 1.3 310 33.42 55.79 1.3 310 Investment 18.42 5.46 5.61 34.98 21.14 6.85 3.1 39.2 20.46 6.63 3.1 39.2 Domestic0credit 33.98 20.4 8.71 76.26 32.08 33.93 1.58 167.54 32.54 31.16 1.58 167.54 Stocks0traded 3.63 8.33 0.02 44.16 7.84 22.46 0 148.77 6.62 19.54 0 148.77

Net$oil(exporters Net$oil(importers All(countries

Variable Mean S.D. Min Max Mean S.D. Min Max Mean S.D. Min Max

Market0capitalization 17.94 17.55 3.75 106.75 19.59 18.01 0.5 100.36 19.05 17.85 0.5 106.75 Institutions 55.37 4.14 45.7 63.9 60.6 4.84 51.5 77 59.18 5.2 45.7 77 Remittances 4.01 3.14 0.01 14.58 2.29 2.7 0 15.75 2.81 2.95 0 15.75 Income 52.97 40.183 13 170 11.84 14.35 1.3 81 22.81 30.17 1.3 170 Investment 18.42 5.46 5.61 34.98 21.56 7.02 3.1 39.2 20.71 6.77 3.1 39.2 Domestic0credit 33.98 20.4 8.71 76.26 23.35 19.3 1.58 100.81 26.25 20.15 1.58 100.81 Stocks0traded 3.63 8.33 0.02 44.16 1.58 4.21 0 34.93 2.27 5.99 0 44.16 Net$oil(exporting$countries Full$sample

Testname Test(statistic p(value null(H Test(statistic p(value null(H Test(statistic p(value null(H

Hausman(test Chi2$=$33.13 p=0.0001 Rejected;$1% Chi2$=$7.06 p=0.5301 Not$rejected Chi2$=$1.61 p=0.9908 Not$rejected

Wald(test Chi2$=$5.23 p=0.2645 Not$rejected Not$allowed Not$allowed

Wooldridge(test Not$necessary F$=$11.359 p=0.0062 Rejected;$1% F$=$24.540 p=0.0002 Rejected;$1%

5.

Results-and-discussion-Table!4!shows!the!panel!regression!results!of!our!model.!In!specification!1,!we!tested!the! impact!of!the!oil!price!on!the!development!of!stock!market!capitalization!for!net!oilL exporters.!Evidence!was!found!for!the!oil!price!having!a!significant!(1%)!and!positive!effect! on!the!dependent!variable.!To!verify!this!finding!we!performed!the!same!regression!without! OPI!(specification!2).!To!test!whether!the!model!with!OPI!(1)!is!better!than!the!one!without! (2),!we!performed!an!FLtest.!The!results!of!this!test!are!in!line!with!our!expectations,!a! significant!testLstatistic!was!found!against!a!1%Lsignificance!level20_{.!For!the!netLoil!exporters!} we!find!a!negative!insignificant!effect!of!inflation!change!on!the!development!of!stock! markets.!A!significant!effect!was!expected.!The!sign,!however,!is!in!line!with!the! expectations.!The!other!classical!determinants!of!stock!market!development!that!are!in!line! with!the!expectations!are!domestic!credit!and!stocks!traded.!Income,!institutions!and! remittances!have!weaker!explanatory!power!than!literature!suggested.!Even!though!theory! suggests!otherwise,!the!finding!for!remittances!is!in!line!with!the!finding!of!Billmeier!&! Massa!(2009).!Furthermore,!theory!suggested!that!institutions!should!have!a!significant! effect,!but!the!analysis!does!not!provide!us!with!a!significant!estimate.!Although!the!theory! is!contradicted!the!result!of!the!estimation!does!not!come!as!a!surprise!as!there!have!been! no!significant!shifts!during!the!investigated!period!in!the!institutional!quality!scores!of!all! countries!in!our!sample.!Furthermore,!Billmeier!&!Massa!(2009)!argue!that!stock!markets!in! the!oilLexporting!countries!have!probably!benefited!mainly!from!oil!revenues!and!for!this! reason!they!did!not!have!to!focus!on!institutional!quality.!Reasons!for!the!insignificant! outcome!of!income!are!harder!to!explain.!Earlier!we!found!a!strong!correlation!between! market!capitalization!and!income.!This,!taken!together!with!theory,!would!suggest!a! positive,!significant!effect!on!stock!market!development.!However,!it!can!be!argued!too!that! as!income!increases!this!has!a!direct!effect!on!market!capitalization!thereby!not!affecting! the!market!capitalization!ratio.!For!investment!a!significant!yet!negative!outcome!has!been! found,!not!in!line!with!the!expectations.! ! When!observing!the!netLoil!importing!group!(specification!3!&!4),!the!results!for!the! oil!price!are!not!in!line!with!our!expectations.!The!oil!price!does!not!have!a!significant!effect! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! ! 20_{!FLtest!between!1}

on!the!development!of!market!capitalization.!Even!though!theory!suggests!there!should!be! a!dependency!on!the!oil!price!caused!by!import!dependency!our!model!does!not!provide!us! with!supporting!empirical!evidence!for!netLoil!importers.!Our!findings!can!be!addressed!to! demandLdriven!circumstances.!An!increase!in!the!oil!price!could!be!a!consequence!of! increased!general!demand,!meaning,!that!increased!expected!economic!growth! compensates!for!the!oil!price!increase!(Arouri!et!al,!2011).!Theoretically,!it!could!be!argued! that!these!countries!already!have!more!diversified!market!because!oil!is!not!an!integral!part! of!their!economies.!However,!for!Africa!this!is!not!expected.!!Even!the!classical!stock!market! development!determinants!are!not!significant!in!this!sample!(except!for!domestic!credit),! this!is!not!in!line!with!our!expectations!but!consistent!with!the!netLoil!exporting!group!and! the!whole!sample.!When!OPI!is!dropped!no!significant!changes!occur!in!the!results.!Only! small!differences!in!the!values!of!RLsquare!are!observed!between!4!and!5.!! For!the!whole!sample!(specification!5!&!6)!an!oil!price!dependency!is!found.!We!can! conclude!that!specification!5!and!6!do!not!significantly!change!from!each!other!because!the! difference!in!RLsquare!is!small21_{.!Furthermore,!it!is!found!that!–!consistent!with!the!oilL} importers!and!oilLexporters!–!institutions,!remittances!and!income!are!not!significant.! Remarkable!for!specification!5!is!that!an!estimate!for!investment!is!found!that!do!is!line!with! our!expectations. !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! ! 21_{!For!the!netLoil!importing!and!the!whole!sample!estimation!it!is!not!possible!to!use!a!FLtest!as!a!robustness!} check!because!a!FLtest!cannot!be!applied!when!using!robust!standard!errors.!

!

Table&422_"

African"economies"with"stock"exchanges:"panel"regression"results,"1988<2012,"(unbalanced)"" "

! ! Net<oil"exporting"countries23_{! ! ! ! Net<oil"importing"countries}24_{" " " " Full"sample}25_!

Regressor" 1" 2" ! 3" 4" ! 5" 6" Institutions! 0.0111! 0.0144! ! /0.00197! /0.00233! ! 0.00698! 0.0139! (index,!1/100)! (/0.83)! (/1.01)! ! (/0.08)! (/0.09)! ! (/0.45)! (/0.92)! Remittances! 0.0371! 0.0384! ! /0.00382! /0.0296! ! 0.0197! 0.0171! (%!of!GDP)! (/1.66)! (/1.61)! ! (/0.08)! (/0.58)! ! (/0.85)! (/0.6)! Income! /0.0272! /0.0345*!!! ! /0.00423! 0.00656! ! /0.00172! 0.00878! (real!GDP!US$)! (/1.43)! (/1.72)!!!! ! (/0.27)! (/0.49)! ! (/0.15)! (/0.71)! Investment! /0.561*! 0.127! ! 0.528! 0.693! ! 0.253! 0.465*!!! (%!of!GDP)! (/1.97)! (/0.67)! ! (/1.4)! (/1.35)! ! (/1.16)! (/1.78)! Domestic!credit! 0.0300***! 0.0268***! ! 0.0110*! 0.0122*! ! 0.0143***! 0.0140***! (%!of!GDP)! (/5.11)! (/4.32)! ! (/1.7)! (/1.79)! ! (/4.32)! (/3.58)! Stocks!traded! 0.0294***! 0.0324***! ! /0.00288! /0.00243! ! 0.000345! 0.00144! (%!of!GDP)! (/5.34)! (/5.58)! ! (/0.89)! (/0.84)! ! (/0.06)! (/0.25)! Inflation!change! /0.0153! /0.00229! ! 0.00679! 0.0126! ! 0.00558! 0.0127! (CPIndex,!2nd!diff)! (/0.85)! (/0.12)!!!! ! (/0.48)! (/0.78)! ! (/0.43)! (/0.93)! Oil!Price!Index! 0.00760***! !!!!!!!!!!!!!!!! ! 0.00418! !! ! 0.00472*! !!!!!!!!!!!!!!!! (real!US$)! (/3.09)! !!!!!!!!!!!!!!!! ! (/1.12)! !! ! (/1.93)! !!!!!!!!!!!!!!!! Observations! 70! 70! ! 165! 165! ! 235! 235! R/square! 0.6418! 0.5827! ! 0.2328! 0.2315! ! 0.2458! 0.2313! No.!of!countries! 4! 4! ! 13! 13! ! 17! 17! ! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! ! 22_{!Notes:!Dependent!variable!is!the!log!of!Market!Capitalization!as!a!share!of!GDP.!R/square!corresponds!to!the!‘within’!value!of!STATA!panel!results.!Source:!World!Bank!Development!} Indicators;!IMF,!World!Economic!Outlook;!Heritage!Foundation!&!author’s!calculations.!T/statistics!in!parentheses;!*=p<0.10,!**=p<0.05,!***=p<0.01.!All!regressions!include!a!constant!not! reported.!The!panel!is!unbalanced.! 23_{!For!regression!1!&!2:!Hausman/test!did!reject!H0!(p=0.0001).!Further,!Wald!test!–!did!not!reject!H0!(p=0.2362).!Used!homoscedastic!standard!errors!and!fixed!effects.!} 24_{!For!regression!3!&!4:!Hausman/test!did!not!reject!H0!(p=0.5301).!Further,!Wooldridge!test!–!did!reject!H0!(p=0.0062).!Used!heteroscedastic!standard!errors!and!random!effects!(Princeton!} University,!2007).! 25_{!For!regression!5!&!6:!Hausman/test!did!not!reject!H0!(p=0.9908).!Further,!Wooldridge!test!–!did!reject!H0!(p=0.0002).!Used!heteroscedastic!standard!errors!and!random!effects!(Princeton!}

6. Conclusions+and+policy+implications+

Financial!development!is!an!indispensable!part!of!economic!growth!and!stock!market! development!an!integral!part!of!financial!development!(Levine!&!Zervos,!1996).!The!aim!of! this!paper!was!to!find!if!the!development!of!African!stock!markets!is!dependent!on!the!price! of!oil.!A!panel!analysis!was!performed!among!17!countries!–!with!stock!exchanges!–!on!the! African!continent!with!the!oil!price!index!as!our!main!variable!of!interest.!Because!the! expectations!were!that!oilKimporters!and!oilKexporters!react!differently!on!the!oil!price,!the! full!sample!was!divided!into!two!different!groups:!(1)!netKoil!exporters,!namely,!Côte! d’Ivoire,!Egypt,!Nigeria!and!Tunisia!and!(2)!netKoil!importers,!namely,!Botswana,!Ghana,! Kenya,!Malawi,!Mauritius,!Morocco,!Namibia,!South!Africa,!Swaziland,!Tanzania,!Uganda,! Zambia!and!Zimbabwe.! ! The!outcome!of!the!panel!analysis!indeed!indicates!a!difference!in!stock!market! development!between!oilKimporters!and!exporters!as!a!reaction!on!oil!price!change.! For!the!netKoil!importers!the!results!of!the!analysis!however!do!not!substantiate!any! specific!policy!implications!because!of!a!relation!between!oil!price!change!and!stock!market! development!whereas!theory!suggests!that!this!dependency!exists.!Theory!did!suggest!that,! because!of!a!dependency!on!oil!import,!an!increase!in!price!would!have!a!direct!effect!on!the! costs!they!have!to!endure,!having!a!negative!impact!on!stock!market!capitalization.!However,! we!find!no!empirical!evidence!to!support!this!theory.!Our!findings!can!be!addressed!to!demandK driven!circumstances,!all!countries!in!the!sample!being!oil!price!takers.!An!increase!in!the!oil! price!could!be!a!consequence!of!increased!general!demand!(Arouri!et!al,!2011).!Thus,!it!could!be! that!the!increase!in!demand!indicates!economic!growth!in!the!oilKimporting!countries!as!well,! which!could!be!a!compensating!factor!for!the!oil!price!increase.!Research!on!this!matter! however!is!not!conclusive.!Additionally,!it!can!be!argued!that!oilKimporters!already!have!more! incentives!to!create!policies!that!focus!on!sustainable!growth!and!decreased!(perceived)!oil! price!dependency.!However,!for!these!oilKimporters!research!shows!no!significant! improvements!in!institutional!quality!as!an!important!factor!for!sustainable!growth.! Strengthening!of!the!institutional!quality!is!recommended!because!it!will!be!beneficial!to!stock! market!development!in!these!countries!as!well!as!research!into!the!reasons!for!this!longerKterm! lack!of!improvement!in!institutional!quality.!! The!outcome!of!the!panel!analysis!shows!a!significant!positive!effect!of!oil!price!change!

on!the!development!of!stock!markets!in!the!netKoil!exporting!group!of!countries.!Meaning!that!if! the!oil!price!decreases!drastically,!this!will!have!a!direct!negative!effect!on!the!market! capitalization!of!their!stock!markets.!This!will!endanger!the!development!of!these!emerging! economies.!The!impact!that!a!structural!increase/decrease!in!the!oil!price!will!have!on!these! countries!depends!on!their!capability!to!diversify!their!economies!away!from!oilKrelated! businesses!into!more!nonKoil!market!segments!(Umar!&!Abdulhakeem,!2010).!One!of!the!ways! to!achieve!this!is!by!giving!priority!to!privatization!of!the!large!amount!of!public!companies!in! these!countries!(Osinubi!&!Amaghionyeodiwe,!2003).!Furthermore,!research!shows!that! prioritizing!the!international!integration!of!stock!markets!to!enable!the!diversification!of!risk! should!be!recommended!(AgyeiKAmpomah,!2011).!This!will!not!reduce!oil!dependency,!but!it! will!create!a!more!attractive!investing!climate!by!enhancing!the!possibilities!of!diversification.! This!is!an!unavoidable!objective!to!maintain!a!vivid!financial!sector!in!which!entrepreneurs! should!be!encouraged!to!build!businesses!in!nonKoil!segments!(Billmeier!&!Massa,!2009).!Other! recommendations!relate!to!improving!government!governance!and!longKterm!strategy!(Uchem,! 2010).!Countries!that!are!dependent!on!oil!do!this!to!themselves!by!neglecting!other!sectors!of! their!economies.!The!incorporation!of!policy!focusing!on!longKterm!and!sustainable!growth!is!a! necessity.!For!example,!this!could!be!done!by!using!oil!revenues!to!invest!in!infrastructure!to! decrease!constraints!for!potential!growth!coming!from!nonKoil!related!segments!(Uchem,!2010).!! ! ! ! ! ! ! ! ! ! ! ! !

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