Supply model estimation of the equity risk premium in selected African equity markets
The supply model of (Grinold & Kroner, 2002)is used to estimate the Equity Risk Premium (ERP) in Kenya and South Africa for the period 2009 to 2013. Total return consists of capital appreciation from inflation, per capita GDP and population growth and income return from dividend yields. The average for Kenya is estimated at 8.3% with a minimum of 5.11% and maximum of 9.8% and that for South Africa is estimates as 6.6% with a minimum of3.15% and a maximum of9.6% over the 5 year period. Fernadez et al (2013) obtain a survey premium for Africa of 8.62%. In (Fernandez, Linares, & Acin, 2014), the market risk premium for Kenya and South Africa were estimated at 11.6% and 6.3% respectively. Capital gains contribute more to ERP as such economic variable contribute a more substantial part of the ERP in comparison to financial variables. Dividend yield exhibit a positive relationship with the ERP hence unequivocally matter in determining the ERP levels. Estimation using priced inflation, including share repurchases in the income return and including the impact of changes in the PE ratio on return will provide more insights on the ERP characteristics in the markets.