An augmented capital asset pricing model

large African markets are used in addition to the London market. The African markets are the large
and well regulated Johannesburg Stock Exchange, the smaller regional hub North African markets of
Egypt and Morocco and the much smaller and less active eastern hub market in Nairobi. The Kenyan
market is split into two components, the main listings and the Alternative Investment Market, which is
designed to encourage listings from the SME sector. Illiquidity series were constructed on a time
series cross section basis and incorporated into the Fama French (1993) risk adjusted CAPM.
Results show this model is superior to both the Sharpe/Linter and the Fama and French
models as illiquidity is both a priced and consistent characteristic in these emerging markets. In all
countries, the market risk premium, the premiums attributed to the size factor and the illiquidity factor,
are important parameters in pricing asset returns. However, the most striking differences between all
the sample group countries are in the dramatic variation in costs of equity. Not surprisingly, London
has the lowest cost of equity, followed by South Africa, although this differential has already
encouraged prominent South African firms such as Old Mutual and Anglo American to list in London.
The markets of Egypt and Morocco have higher costs of equity that both London and Johannesburg
but the highest is that of Kenya. In particular, the AIMS market has a cost of equity over three times
that of the main Kenyan listings board. This suggests that companies in Kenya are only able to access
equity finance at a distinct disadvantage to other locations and also that the development policy of
established stock exchanges attempting to attract the SME sector is serious flawed. In terms of the
international investor there is considerable evidence of segmentation amongst the African emerging
markets highlighted by the very different risk premiums and costs of equity in each case. However
considerable benefits can be made through explicitly incorporating size and liquidity premiums into
models that would go some way in capturing the nuances of these markets thereby facilitating equity
portfolio investment and FDI through stakes in listed equities.