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Researcher of the Month: Ferdinand Othieno, Determining Equity Risk Premium – African Markets

With Kenya increasingly growing as a hub for investment, and with the Global Entrepreneurship Summit being held in Kenya in June this year, financiers and investors will need to quantify the risk associated with investment flows into the country. How will financiers quantify this risk?


Mr. Ferdinand Okoth Othieno, Research Director at the Strathmore’s School of Finance and Economics (SFAE), is working on a stimulating research angle that seeks to give part solutions to this very exciting yet crucial topic for investors.

What is your PhD Research on?

My topic is: The role of cash flow risk in estimating the equity risk premium in selected African markets.

The central issue here is on equity risk premia; what is the excess return above the risk-free rate that investors should demand for investing in African equity market? This excess return compensate investors for taking on the relatively higher risk in the equity market. The core problem is, can we estimate the number based on cash flow or cash flow risk? Hopefully by taking this approach one may breach the evident disconnect between a fundamentals-based approach to forecasting pay-offs and a returns-based approach to estimating risk.


Why this is of interest now? Because we have the ‘rush for Africa’ with about 8 stock markets classified as frontier markets in 2015 alone (MSCI) – A frontier market is a type of developing country which is more developed than the least developing countries, but too small to be generally considered an emerging market. In addition Kenya was recently rated as one of the top seven hottest destinations for foreign direct flows. The investors coming into the country will need to be compensated for the risk they take. Is there a way we can quantify to investors the risks?

Data and Research Findings?

My data is 100% available in secondary form i.e. online from Datastream, Bloomberg and Damodaran. I have obtained financial statements level data and market level data for companies listed on the stock markets of interest to the study; I will carry out research on 34 frontier markets so as to extract substantial information for robustness checks and reasonableness test.


At the moment I am working on the 8 African frontier market countries; Kenya, Nigeria, Botswana, Tunisia, Mauritius, Ghana, Uganda, Tanzania and South Africa as an emerging market country. Emerging markets are developing markets, while frontier markets are markets that exhibit very high growth at a fast rate but since they are coming from a very low risk are being taken as frontier market, hoping they would be joining the emerging markets soon. I am comparing frontier markets in Africa against frontier markets in the rest of the world.


Preliminary findings indicate the statistical significance of accounting risk factors even after adjusting for the effects of accounting growth factors. These findings implies pricing of accounting risk factors and a penalty for unfavorable accounting growth factors. The pricing effect also varies with company sizes as measured by market capitalization.


The next strand of enquiry in on simultaneous extraction of the equity risk premium from cash flow risk bilinear auto-regression and stochastic volatility estimation approaches.  

What challenges are you facing while carrying out the research especially because it involves so many countries?

My number one challenge is in accessing the required data or the lack of data as a whole, which interferes with concluding the work. I cannot conclude my work based on research in Africa alone; I have to compare my work with other frontier markets around the world. 


Another challenge lies in the timings for getting certain data; because I am working on accounting information that comes annually. So annually how many observations do I need to make in order to make coherent statistics?

Benefits of conducting this research?

Although the valuation relevance of accounting fundamentals has been commonly accepted, researchers have paid surprisingly little attention to fundamentals´ risk relevance. In fact, the literature on fundamentals-based equity risk measurement is in an early phase of development, making theory development an integral part and contribution of this study.


Other foreseen contributions arising from this research will include: (1) The study will systematically evaluate the reliability and relevance of accounting information for equity risk measurement; (2) The study will identify and evaluate the determinants of accounting´s usefulness in measuring equity risk; and (3) The study will contrast fundamentals-based against market-based (price-based) risk measurement approaches, and (4) the research possesses strong potential to influence valuation practice, both for listed and private equity investments.

Where did your interest for Finance generate?

My Finance journey has been much of “taste and see” eliminate and redefine. When I was growing up I wanted to be an accountant; I have been told that was my dream since I was in class two! So when I joined Butula Boys High School, I picked Business studies and specialized in accounting; at the time I thought that was the nearest to finance I could get. Then I joined Maseno University and discovered accounting was not it, so I packed my bags for Finance though I still use quite a significant chunk of accounting especially International Financial Reporting Standards. Currently am “knee-deep” into Mathematical Finance.

What is your Education background?

I Hold a Bachelor of Business Administration in Finance from Maseno University and a Master of Banking and Finance from Moi University. I am currently pursuing a PhD in Finance from the Graduate School of Business, University of Cape Town, South Africa.


I have also pursued a number of professional courses; I am a certified Public Accountant and a level 3 candidate in the CFA program.

Why did you choose to study your PhD in Cape Town?

I started my PhD at Strathmore University and even before I submitted my proposal one of my supervisors left. I was introduced to my current supervisor through my mentor and friend, Dr. Odongo Kodongo. It has been intellectually stimulating working under the guidance of Prof. Nicholas Biekpe.

What was your Masters’ thesis on?

I developed a thesis based on the East African Community and whether we are ready for a common market currency protocol; Are we ready for a common currency given the statistics and criteria the 5 countries need to fulfill for them to form a common market and a common currency union?


Based on multivariate econometric analysis I found out is that we are very far from being a common market. I have continued keeping tabs on this topic and supervising students doing work on the East African community. I am hoping to improve the model and the methodology used to take into account the psychological and behavioral aspects of the impending Union. Hopefully I the curiosity will still be illuminating by the time I am done with my PhD.

Where do you draw encouragement to keep going?

God! He is a God who deserves the best! All I do is a sacrifice unto Him!


I also believe that my work is my signature; it is a testimony of Ferdinand at all times.

What is your Family Background?

I am a first born in family of six.


I am married and I have two lovely daughters; the first born is 7 years old while the younger one just turned one.

What would you give aspiring PhD students?

Before you jump on that train ask yourself these questions; 

Why do you need to do the PhD?

Must you get a PhD?


Actually any reason is good reason. It just makes the going much easier if you are enthused by contribution to the field of knowledge.

Ferdinand’s’ Publication

Othieno F. (2012): “Examining International Parity Relations between Kenya and Uganda: A Cointegrated Vector Autoregressive Approach” International Journal of Economics and Finance, Vol. 4, No. 6; June 2012, pp. 133 – 140