Kenyan investors' overreaction to the AGOA news: evidences from the Nairobi stock exchange.

Author:Nezerwe, Yvan
Position:American Growth Opportunity Act
 
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  1. INTRODUCTION

    The AGOA (American Growth Opportunity Act) legislations are American legislations, signed in 2000, that provided duty-free access for selected African products (Agricultural, Chemical and Textile products) from eligible African countries. The AGOA eligibility is tied to democratic principles, anti-corruption policies, open rule-based trading systems, poverty reduction policies, rule of law labor rights and market-based economies. African countries anticipated the benefit of exporting a number of goods duty-free to the United States, a market of more than 300 million consumers. Kenya was one of the first African countries eligible in the AGOA.

    Before AGOA, Kenya could export (on a duty-free basis) selected goods (Agricultural and fishery) to the US under the GSP (Generalized System of Preferences). The US government instituted the GSP in an effort to promote economic growth in developing countries. The eligible products include agricultural and fishery products.

    The AGOA legislations were widely cheered in Africa because of the anticipated benefits. This study analyzed the behavioral effects caused by the news of AGOA on Kenyan investors. A behavioral model was used in assessing the behavioral effects. The results showed that Kenyan investors overreacted to the news of AGOA.

    The rest of the paper is as follows: Section 2 reviews the literature, Section 3 describes the methodology. Section 4 provides the results and concludes the study.

  2. LITERATURE REVIEW

    The field of Behavioral Finance introduced the concept of "human psyche" in the financial decision-making process. It is built on cognitive psychology and the limits to arbitrage.

    The efficient market hypothesis states that two assets should have the same price if they have the same payoff in an efficient market. Mispricing would create the opportunity of arbitrage. Shiller (2003) defined arbitrage as the process of buying and selling differently priced items on the same value and pocketing the difference.

    Arbitrage can be affected by risk and capital outlay in real market (as opposed to efficient market). Recent research in Behavioral Finance has identified fundamental risk, noise trader risk and implementation risk as elements that limit the arbitrage process in the market.

    Behavioral Finance researchers have tried to understand the two main phenomena, namely "overreaction" (excessive reaction to new information) and "underreaction" (situation where individuals or investors...

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