Pandemics, Country Risks and Stock Return: Evidence From Selected Countries in Africa

Abstract

Africa has contributed positively to the financial liberalization that the world seeks to achieve. However, series of factors have been studied to have influence on stock prices of which pandemic is one of the key factors. Due to the variations of stock market prices among countries during pandemic, this study seeks to analyse the factors contributing to these discrepancies by considering the moderating role of country risk on the relationship between pandemic and stock return. Country risks is one of the country level factors influencing the stock market. This study, therefore sought to analyse the role of country risk on the relationship between pandemics and stock returns in Africa. The study was centered on the Efficient Market Hypothesis and Arbitrage Pricing Model. The research philosophy employed in the study was positivism whereas the study design was explanatory research design. Annual panel data between the period 2000 to 2020 from fifteen Africa countries were used in the study. Mixed panel estimation techniques including Fixed Effect, and Random Effect were used to test the hypothesis of the study. The study found that stock markets react negatively during pandemic era. Political risk and economic risk had a negative impact on stock returns in Africa. The study also found that there was a positive significant impact of the interaction between pandemic and political risk on stock returns. The interaction term between pandemic and financial risk was also significant. Based on the findings above, the study recommended that political stability must be managed extremely well to reduce the negative impact of the pandemic on stock returns. Reduction in corruption would prevent stock market regulators from bribing their way through to erect barriers to investment in the stock market.