Predicting Active Risk in African Securities Exchanges
The purpose of this study is to use a specific risk package to test how well it performs in the African environment.
As all the risk packages are widely used overseas, particularly in first world countries, it can be assumed that they perform reasonably well in first world countries. However, an empirical study to test if such a system is applicable to Africa, which is at best a semi-strong efficient market, has never been undertaken. The main reason for this is that a risk model catering specifically to the African continent is difficult to construct because of limitations such as thin trading and limited data. Projected tracking error (TE), sometimes referred to as active risk, is the most widely used method of measuring predicted risk and is the central feature of all the packages mentioned above. We find that the performance of this package in predicting active risk for 17 S&P African Indices is in line with predictions. Across all 102 portfolios, average predicted tracking error for 1 year was 23.8% against the observed tracking error of 21.2%.
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