Liquidity estimation in major African equity markets

Bruce Hearn*
Sir John Cass Business School, and
Kings College London

Abstract
African emerging equity market returns are characterized by volatile, but substantial returns,
which are affected considerably by varying degrees of liquidity cost ranging from 0.15% in
Morocco to 53.37% in Tunisia. Many of the markets are dominated by a smaller group of
blue chip stocks and intra-market liquidity differences can be extreme with differences
greater than 100% in South Africa between the market aggregate and the constituents of the
prestigious JSE Top 40 index. Using firm-level bid-ask quoted prices for six African markets
of Morocco, Tunisia, Egypt, Kenya, BRVM and South Africa as well as two European markets
of London and Paris the evidence suggests that the percentage of zero daily returns price
rigidity measure and the Liu (2006) volume based constructs perform better at representing
inter and intra-market liquidity effects than price-impact measures such as Amihud (2002).

JEL classification: G15; N20

Keywords: Liquidity, Liquidity Determinants, Emerging Financial Markets, Africa
*

Corresponding author: Department of Management, Kings College London, 150 Stamford

St, London SE1 9HN. Tel: 44(0)207 848 4164. Email: bruce.hearn@kcl.ac.uk

1
Electronic copy available at: http://ssrn.com/abstract=1345270

Liquidity estimation in major African equity markets

African emerging equity market returns are characterized by volatile, but substantial returns,
which are affected considerably by varying degrees of liquidity cost ranging from 0.15% in
Morocco to 53.37% in Tunisia. Many of the markets are dominated by a smaller group of
blue chip stocks and intra-market liquidity differences can be extreme with differences
greater than 100% in South Africa between the market aggregate and the constituents of the
prestigious JSE Top 40 index. Using firm-level bid-ask quoted prices for six African markets
of Morocco, Tunisia, Egypt, Kenya, BRVM and South Africa as well as two European markets
of London and Paris the evidence suggests that the percentage of zero daily returns price
rigidity measure and the Liu (2006) volume based constructs perform better at representing
inter and intra-market liquidity effects than price-impact measures such as Amihud (2002).

1.

INTRODUCTION

The rapid development of securities markets across Africa since the demise of the Cold War
has seen the creation of new small markets in many countries while older and more
established exchanges have grown in size and scope. Currently there are over 23 stock
exchanges on the African continent with the majority having been established since 1990.
However while these strive to make progress in attracting foreign investment to supplement
often very low levels of domestic savings and act as a competitive venue for firms to raise
finance to support industrial production and growth a critical determinant in assessing their
viability is in the effective measurement of liquidity. The ability to accurately measure
liquidity and attribute a risk premium is critical for investors in successfully implementing
portfolio diversification strategies.
Emerging equity markets and in particular those of Africa have reported substantial
returns in US$ terms in recent years. However these returns are significantly reduced in the
presence of often severe liquidity inferring significantly lower risk-adjusted returns. The
importance of the inclusion of liquidity in valuation models is underscored by Bekaert et al.
(2003) and more recently by Liu (2006) where an additional liquidity premium to the market
premium is found to offer improved explanatory power of the cross section of asset returns.
Pastor and Stambaugh (2003) find evidence that investors employing leverage and facing
solvency constraints do require higher expected returns for holding assets that are difficult to
sell when aggregate liquidity is low. Furthermore stocks with a higher sensitivity to
aggregate liquidity generate higher returns than low-sensitivity stocks inferring that liquidity
is an important state variable for asset pricing. The inability of the traditional CAPM and the
three factor augmented CAPM of Fama and French (1993), seeking to describe the cross
section of asset returns with additional size and book-to-market factors, in capturing liquidity

2
Electronic copy available at: http://ssrn.com/abstract=1345270

effects represents a serious caveat in asset pricing (Liu, 2006). Liu (2006) in line with Daniel
and Titman (1997) finds considerable evidence of the limited explanatory power of the Fama
and French model in capturing the cross section of asset returns. The few studies that have
attempted to address liquidity focus either on developed markets such as the US equity
market (Liu, 2006 and Stoll, 2000) or have a much wider view across emerging markets in
general (Lesmond, 2005) with little attention paid to Africa. In addition emerging markets
have characteristically skewed profiles with often only a handful of stocks dominating the
market in terms of trading activity and market capitalization. Consequently the trading and
hence liquidity profiles of these top tier, or blue-chip, stocks which attract considerable
interest from investors is often very different from the aggregate market. Those studies that
do assess the efficacy of liquidity estimators, such as Lesmond (2005), Liu (2006) and
Bekaert et al. (2003), view liquidity on an aggregate market-wide scale and do not take into
account the often tiered structure of equity markets.
Liquidity by its very nature has proved a difficult concept to define. Much of this
difficulty has arisen through its ability to transcend a number of transactional properties of
markets including tightness, depth, resiliency (Lesmond, 2005) and information (OHara,
2003). Empirically defined constructs designed to capture this phenomenon centre on
measurement of direct trading costs, such as tightness, which is measured by the bid-ask
spread (quoted or effective) and indirect trading costs, linked to depth and resiliency, which
are often represented by price impact measures. The lack of reliable and consistent bid-ask
quotes in many emerging markets infers the use of market activity proxies in capturing
liquidity. However there is little consensus regarding the applicability and efficacy of
ubiquitous measures such as turnover and percentage daily zero returns as well as the more
recently developed price impact variable of Amihud (2002) nor very recently developed
measures such as that of Liu (2006). Consequently this study centres in testing these
measures against the quoted bid-ask spread to determine each measures efficacy in
estimating the underlying liquidity.
This paper is structured as follows. Section 2 provides an overview of the
institutional features of Africas markets while section 3 introduces the liquidity measures and
their construction. Section 4 provides a comprehensive overview of data related issues and
preliminary analysis from data while section 5 details the empirical methods employed.
Section 6 discusses the results and the final section concludes.

2.

AFRICAN EQUITY MARKETS

Sub-Saharan Africas equity markets are generally small and with the notable exceptions of
South Africa and the three North African countries of Egypt, Morocco and Tunisia account
for a mere 10.78% of the continents market capitalization (Table 1). Furthermore South

Africa alone accounts for 74.70% of the continents capitalization and alongside the North
African markets features prominently in emerging markets investors inventories. The
marginalisation of smaller Sub-Saharan African (SSA) equity markets in portfolio allocation
is noted in a World Bank report which finds that in 2003 the region only attracted 3.5% of the
total $14.3 billion worldwide foreign equity portfolio investment (African Business, 2005).
Apart from a few prominent exceptions, most notably that of South Africa and Botswana, the
size of stock markets in relation to rest of economy, indicated by the market capitalization to
GDP ratio, is low. South Africas 232.7% ratio of market capitalization to GDP is in line
with ratios prevailing in many OECD countries. However traded turnover ratios, relating
traded value to market capitalizations, across the continent are depressed and with one
exception are generally less then 45%. This provides further evidence of liquidity being a
pervasive problem across Africas securities markets.
Table 1
The lack of liquidity in Africas markets and consequent high premiums and high costs of
equity plays a major role in rendering market based equity finance uncompetitive in the face
of cheaper alternative forms of finance. These can take the form of bank-based finance,
which is more common in Francophone countries adhering to French civil code, as evidenced
from Table 2, or various forms of internal finance such as remittances between family
members and transfer pricing. Generally Africas markets demonstrate low levels of primary
market activity, shown in Table 2, with the few IPOs undertaken being small and infrequent
suggesting political factors may play a more significant role in motivating firms to list. Table
3 provides evidence of the considerable concentration of market capitalization and traded
value in only a handful of blue chip stocks in contrast to the rest of the market. The regional
BRVM bourse, based in Cote dIvoire and serving UMEAO 1 nations, has the most
concentrated profile with 46.51% of market capitalization and 53.95% of traded value in one
stock alone, Sonatel, the Senegalese telecommunications company. However many of the
other markets, including Tunisia, Morocco and Kenya have equally skewed profiles with
financials sector generally having the highest concentration of capitalization. This is largely
due to the smaller and less well capitalized finance companies, such as domestic banks and
insurance firms, seeking listings to diversify their balance sheets in order to comply with
international regulatory best practice concerning deposit insurance.
Tables 2 and 3

UMEAO refers to Union Montaire et conomique de lAfrique de lOuest (UMEAO) and includes
Cote dIvoire, Benin, Togo, Burkina Faso, Mali, Niger, Senegal and Guinea-Bissau

The principal characteristics of the markets used in this study, which themselves have been
selected on the basis of availability of bid and ask quotes, are summarised below (see Piesse
and Hearn (2005) for an extended discussion of African stock markets):

BRVM (Bourse Regionale des Valeurs Mobilieres)

The Bourse Regionale des Valeurs Mobilieres, or BRVM, was originally established in 1973
as the Bourse de Abidjan, in Cote dIvoire. Given the existing economic and monetary union
across Francophone West African countries, UMEAO, the focus of the local exchange was
extended in 1998 to a regional basis and participation was encouraged, both in new listings as
well as investment, from across the UMEAO. The trading system is electronic with remote
terminals installed in each of the licensed brokers, or Societe de Gestion et d'Intermdiation
(SGI). Trading is undertaken five days per week and starts with a pre-opening call auction
followed by continuous auction from 10-00 to 10-30am (BRVM website, 2009). Nine
brokers, or SGIs, are based locally in Abidjan, with another three in Dakar, Senegal where the
regions central bank is located, and another four in Benin. All other UMEAO countries have
one SGI, which as in the case of Mali has been established jointly between the local finance
communities. Technical issues relating to exchange activities and marketing of the exchange
are handled by a separate Antennae de Bourse, which is located in each UMEAO country
(Bocoum, 2009 and Sissoko, 2009). Settlement is in partially G30 2 compliant and there are a
small number of well capitalized international custodian banks in the market, including
affiliates of Societe Generale, BNP Paribas, Credit Agricole and Citigroup. Trading activity
and market capitalization, as shown in Table 1, is highly concentrated with Sonatel, the
Senegalese telecommunications company, accounting for 53.95% of traded value and 46.51%
of capitalization. Although the microstructure of the regional bourse has been designed to
precipitate the maximum order flow possible in one of the poorest regions of the world the
evidence from Table 4 suggests that it offers institutional investors in the UMEAO minimal
opportunities for diversification. Table 4 indicates that average annual order flow from Mali
accounts for under 2% of traded value on the regional bourse which itself is one of the least
liquid in Africa. Furthermore this figure is overwhelmingly dominated by a single individual
investor who accounts for over 90% of trading activity amongst the tiny retail investment
community. This adds further support to the assertion in Lavelle (2001) that the BRVM acts
2

G30 relates to the Group of Thirty which is the most influential body to encourage the standardisation
and improvement in global securities administration. Following a symposium in London in March
1989, the following recommendations were agreed: i) Brokers should match trades on day after deal
date (T+1); ii) Trade confirmation on trade day plus 2 days (T+2); iii) Central Depository for safe
keeping of shares; iv) Net basis settlement of cash and stock; v) Settlement takes place as delivery vs.
payment or receipt vs. payment; vi) Settlement in same day funds; vii Settlement effected on trade
date plus 3 days (T+3) 8; viii) Securities lending should be permitted; ix) International securities
numbering system must be adopted (ISIN code).

to further concentrate wealth in the hands of local elites rather than as a redistribution
mechanism enforcing high governance standards through diversified ownership.
Table 4

Kenya
The Nairobi stock market was established informally in the 1920s before formal
incorporation into a company in 1954. In 1991 the exchange acquired its current premises
and liberalization was undertaken three years later. While trading was originally conducted
through the open outcry system a successful migration project was initiated in 2006 to
transfer all activity to centrally located floor-based brokers. A Central Depository exists and
all investors, retail and institutional are required to open an account before submitting orders
to brokers for ultimate execution on the floor via the electronic continuous auction system
(NSE website, 2009). The market is central to plans for wider East African integration with
markets in Uganda and Tanzania and three prominent Kenyan firms, Kenya Airways, Jubilee
Holdings and East African Breweries Limited, have cross listed between the three exchanges
in an initial step towards the achievement of that goal.

Egypt
The Egyptian stock exchange is one of the oldest in Africa having been formed through the
integration of the stock exchange of Alexandria, established in 1888, and Cairo, established in
1903. Trading is electronic and between floor-based appointees of local brokerage firms and
occurs within three markets: an OTC market, a Primary Dealers Bonds market, and a Listed
Securities market. The latter is formed of a pre-opening session from 9.45am to 10-15am
followed by continuous trading between 10-30am and 14-30pm five days per week. A CSD
exists in order to assist settlement which is generally in partial compliance with G30
recommendations and a number of large well capitalized custodian banks exist in order to
assist overseas investors (CASE website, 2009).

Morocco
The Moroccan stock market, the Bourse de Casablanca, was established in 1929, making this
market one of the oldest in North Africa. The exchange has progressed through several phases
of development and in 1997 adopted an electronic trading system based on order matching
located centrally. The trading system was improved further in 2001 to facilitate delocalised
trading from the offices of the local brokers. MAROCLEAR, the national central securities
depository, was established in 1998 for settlement, securities transfer and payment and to
minimise operational risks. This became fully G30 compliant by 2001 with settlement versus
delivery occurring on trade date plus three working days (Bourse de Casablanca website,

2009). Trading is reported electronically to market participants and to international data

vendors such as Bloomberg and Reuters. This gives the market the opportunity to attract
overseas investors. Stock market awareness is high and the exchange is used as a successful
route for domestic flotation, although it also attracts significant retail and institutional
investors.

Tunisia
The Bourse de Tunis was established in 1969 and demutualized in 1995 with controlling
shareholders being the stakeholders in the market, i.e. the local brokers, of which there are 24.
Trading was migrated to an electronic system, NSC, under the guidance of Euronext with
outlets installed in all licensed members in 1996, and is further split into fixing and
continuous systems, with the former handling small and illiquid securities and being
comprised of a series of sequential electronic call auctions (Bourse de Tunis website, 2009).
Trading hours in continuous market are 9-00am to 14-10pm in the months outside July,
August and Ramadan where hours are 8-30am to 12-10pm. Settlement is fully compliant
with G30 guidelines. However there is little domestic stock market culture and only an
estimated 5% of finance raised by firms in 2007 was done so through the stock exchange
(Zribi, 2008).

South Africa
The Johannesburg Securities Exchange is the oldest and largest market in Africa having been
established in 1887. A sophisticated electronic trading system has been adopted by the
market since the disbanding of the former open outcry system in 1996. This system was
extended to become a regional trading system linking the integrated market of neighbouring
Namibia in 1998 and upgraded in 2002 under the guidance of the London stock exchange to
the current Shares Electronically Traded, or SETS, system. A central depository exists, the
Southern African Financial Instruments Clearing and Settlement System (SAFICAS), which
is based on technology used in the Swiss stock exchange, and the market adheres to high
levels of corporate governance, the King I and II reports 3, and regulatory standards (JSE
website, 2009).

3.

DATA AND LIQUIDITY MEASURE CONSTRUCTION

3.1

The Bid Ask spread and commission cost

The data on the end of month bid and ask quotes were collected from Datastream for London,
Paris, Morocco and Kenya, Bloomberg for Tunisia, Egypt and South Africa, and the stock
3

The King Reports that regulate corporate governance practices in South Africa is very similar to the
UK Cadbury Report and the US Sarbanes-Oxley Act.

exchange website for BRVM. Data is unavailable for all other African markets, including
Nigeria, Ghana, Botswana and Mauritius, causing the number of markets to be limited to
those included within this sample group. There is considerable variation in the length of
intraday data available with that for London, Paris, Morocco, and Tunisia all being available
for over 15 years. South Africa is consistently available from 2000 and Kenya is available
from 1995 to 2005. Intraday data for the BRVM is available since inception in 1998 from the
stock exchange website. Owing to inconsistencies between the various data sources it is also
necessary to corroborate data with that obtained direct from the individual markets
themselves. The bid-ask spread is calculated using the average of the available monthly
quotes and incorporates at a minimum a single months quote for that month. The average
bid-ask spread spanning the month is used for the estimate of the spread. This procedure
minimizes outlier problems and averages out the recording of either highs or lows in quotes
resulting from monthly sampling. Finally in line with Lesmond (2005) bid-ask spreads that
exceed 80% are trimmed as these are deemed to have resulted from coding errors. The
monthly quoted spread is defined as:
( Ask M Bid M ) ( Ask M 1 Bid M 1 )
+

Quoted spread M = 1 / 2
( Ask M + Bid M ) / 2 ( Ask M 1 + Bid M 1 ) / 2

(1)

In order to estimate the total trading transaction costs, the costs associated with a
round trade, or opening and subsequently closing a position are added on to the quoted spread
for each month. Brokerage and Exchange fees are calculated from the fee schedules detailed
in Appendix 1. When a percentage commission fee is not provided the maximum fixed cost
is applied to the aggregate daily traded value data.

3.2

Turnover

Daily trading volume data and shares outstanding data was obtained from a combination of
Bloomberg, Datastream, and the national stock exchanges. At first glance it is apparent that
there is considerable variation in this measure on an intra-market basis. This reflects the
substantial differences in both liquidity and turnover for many of the companies within each
market. Any turnover statistics that exceed 100% of the shares outstanding in any month are
trimmed from the sample. The shares-outstanding is determined at the start of the year and
remains constant for the 12 months thereafter. The daily turnover measure is defined as:
M

1 DM (volumet shares - outstandin g )

(2)

t =1

where DM is the number of days in the month, M.

3.3

Amihud (2002) measure

Daily price and volume data are sourced from Bloomberg, Datastream and the national stock
exchanges. The daily security prices are scanned for data errors, omissions and delistings.
Following the procedure outlined in Lesmond (2005) the prices are used calculate daily
returns. To control for return outliers, a data error filter eliminates daily prices that are +/50% of the prior days price and that days price as well as previous days price are deleted
from sample. Equally if zero volume occurs on day t, then that day is deleted from average.
Finally the measure is multiplied by 106 as undertaken in Amihud (2002) in order to provide a
common representation of measures and facilitate comparison. The Amihud measure is
defined as:
M

1 DM (| Rt | Pr icet Volume t )

(3)

t =1

3.4

Liu (2006) measure

Daily price and volume data are collected from Datastream. The measure is derived from the
recent work of Liu (2006) and is defined as LMx which is the standardized turnover-adjusted
number of zero daily trading volumes over the prior x months (x = 1, 6, 12) i.e.

LM x = (Number of daily volumes in prior x - months) + 1 x month turnover

Deflator

(21x NoTD )

(4)

where x_month_turnover is the turnover over the prior x months, calculated as the sum of the
daily turnover over the prior x months, daily turnover is the ratio of the number of shares
traded on a day to the number of shares outstanding at the end of the day, NoTD is the total
number of trading days in the market over the prior x months, and Deflator is chosen such
that,
1
0

(x month turnover ) 1

(5)

Deflator

for all sample stocks 4. Given the turnover adjustment (the second term in brackets in first
expression), two stocks with the same integer number of zero daily trading volumes can be
distinguished: the one with the larger turnover is more liquid. As such the turnover
adjustment acts as a tie-breaker when sorting stocks based on the number of zero daily trading
volumes over the prior x months. Because the number of trading days can vary from 15 to 23,
multiplication by the factor (21x/ NoTD) standardizes the number of trading days in a month
to 21 which makes the liquidity measure comparable over time. LM1 can be interpreted as
the turnover-adjusted number of zero daily trading volumes over the prior 21 trading days,
which is the approximate average number of trading days in a month. The liquidity measure,
4

In line with Liu (2006) a deflator of 11,000 is used in constructing estimates for LM1

LMx is calculated at the end of each month for each individual stock based on daily data.
Daily data is available for all markets across entire sample period.

4.

DATA AND PRELIMINARY FINDINGS

Daily stock closing, bid and ask prices, total number of shares outstanding and traded
volumes in local currency and converted into UK were obtained for London, Paris, Kenya,
and Morocco from Datastream. These variables were sourced from both Bloomberg and the
national stock exchanges for Tunisia, Egypt, South Africa and BRVM. These data formed the
basis of calculation of the daily return variance, or volatility, market capitalization, defined as
total number of shares outstanding multiplied by daily closing price, and various liquidity
constructs. Exchange rate data are sourced from Datastream. In many cases companies were
deleted from sample owing to either data inconsistencies or the lack of availability of certain
variables.
The skewed nature of Africas equity markets in terms of trading activity and
capitalization is highlighted in Table 5. This contrasts the mean cross section values for daily
percentage zero returns, stock prices, traded volumes, market capitalization and bid-ask
spreads for the component firms within London and Paris as well as the African markets. The
latter are further sub-divided with South Africa, Kenya, Egypt and Morocco being split into
an aggregate sample representing the overall market and a separate smaller sample of
constituents of the most prestigious top tier indices within each market. Tunisia and BRVM
are subdivided between aggregate market constituents and the top ten firms ranked by market
capitalization. There is clear evidence of a size effect in all markets, with the mean cross
sectional capitalizations of the leading index and top 10 constituents being several orders of
magnitude larger than the overall market. Similarly the bid-ask spread, representing liquidity,
decreases as mean cross sectional firm size increases indicating the association between size
and liquidity, although this is not the case for BRVM where bid-ask spread increases as firm
size increases from value of 0.0592 (5.92%) for cross section of 33 firms to 0.0857 (8.57%)
for top 10 firms. The percentage of zero daily returns variable, another measure of liquidity,
in line with the general trend of bid-ask spreads, also decreases from the aggregate market
groupings of firms to the those of the top 10. However the greatest degree of aggregate cross
sectional illiquidity is in the markets of BRVM and Tunisia and South Africa. The evidence
suggests that the greatest differences between overall market and top tier index constituents
occurs in South Africa where in bid-ask spread alone the aggregate value (0.1007, or 100.70%)
is fourteen times greater than that of the prestigious JSE Top 40 constituents (0.0070, or
0.70%). The BRVM is the most illiquid market with a percentage daily zero returns value of
89.65% for the overall market and 83.86% for the top 10 firms demonstrating the severe price
rigidity present in West African markets.

10

Table 5
An assessment of the correlations between the key variables affecting the bid-ask spread and
liquidity is provided in table 6. Given the variables have different measurement scales a nonprobability distribution limited correlation, the Spearmans rank, is used for the measurement
of association. In addition to the bid-ask spread and the two liquidity measurement constructs,
turnover and Amihud variables, price, daily price return volatility, traded volume, and market
capitalization measures are introduced as control variables in line with those used in the
investigations for price of trading immediacy undertaken by Stoll (2000). The rationale for
the inclusion of these variables is based on order processing and inventory considerations of
traders, albeit in a study undertaken by Stoll (2000) in the US equity market. Increases in
volume and firm size increase the probability of locating a counterparty, thereby mitigating
the risk of accepting and holding inventory risk. The stock price volatility, in local currency
terms, provides an indication of the risk of adverse price changes of a stock placed on a
traders inventory, while the price measure itself controls for the effect of discreteness and is
an additional proxy for risk in that low price stocks tend to be riskier. In this light traded
volume is significantly, as indicated by correlations of over 50%, positively correlated to
market capitalization in all markets except BRVM. The BRVM is also unique in having a
positive correlation between stock price and market capitalization which infers that large
stocks have higher prices as expected. In terms of the liquidity measures and the Amihud
construct is highly positively correlated to the bid-ask spread in London and Paris while
significantly negatively correlated to both market capitalization and traded volume for
London and Paris as well as Tunisia. This is intuitively expected as any trading activity in
stocks which are generally less traded and have lower market capitalizations consequently has
a higher impact on price, which is measured by the Amihud construct. Counter intuitively in
the case of BRVM and Morocco traded volume has a positive correlation with the Amihud
measure indicating that more highly traded stocks have greater impacts on price, although this
may be an effect of severe illiquidity in these markets. The turnover variable is positively
correlated to traded volume in the markets of Morocco, Tunisia and BRVM indicating as
expected that increased trading volume leads to higher values of turnover, which is in line
with the volume-based focus of this liquidity measure. Intuitively however the Liu measure
has a negative correlation with the traded volume measure in all the African markets
indicating that as volume decreases this measure of illiquidity increases. Similarly it has a
negative correlation with bid-ask spread and Amihud price impact illiquidity measure for the
markets of Egypt, South Africa and Tunisia which is intuitively expected. Interestingly the
percentage zero daily returns price rigidity variable only has significant correlations for the

11

African markets and these are generally positive with Liu and Amihud measures and negative
with turnover.
Table 6

5.

EMPIRICAL METHODS

This section assesses the degree of association between the bid-ask spread, and total trading
costs, and the various liquidity measures. Tests are performed both on an aggregate country
basis as well as on sub-groups of firms that are constituents within either top tier market
indices or fall within the top ten firms, as ranked by market capitalization, for BRVM and
Tunisia.
5.1

An assessment of liquidity measures ability in explaining total costs

A direct test of association is undertaken between the total trading costs, otherwise defined as
bid-ask spread plus commission cost, and the various market variables used to proxy liquidity
as outlined in Stoll (2000) through panel regressions with both time series and cross sections
dimensions to take account of individual firms within a market. These market variables daily
return volatility and the log transformation of price, traded volume and firm size, or
capitalization. Price represents a risk in the context that lower price stocks tend to be more
riskier and controls for the effects of price discreteness (Lesmond, 2005). Traded volume and
firm size represent order processing and inventory considerations and signify the risk
involved in locating a trading counterparty. Finally volatility represents the risks of placing a
stock into a trading inventory through adverse price changes (Stoll, 2000). Additionally and
following Lesmond (2005) the turnover liquidity construct is log scaled too. This
transformation is in line with the literature and removes significant skewness in this variable
that would otherwise distort its statistical significance if left untransformed.
In each case six sets of multivariate regressions are employed with the common
dependent variable in all cases being the total trading costs. The first regresses the total
trading costs variable against the market control variables, outline in Stoll (2000) i.e. price,
volatility, volume and firm size. The next four regressions involve total trading costs
regressed against the Stoll (2000) market control variables in addition to each individual
liquidity construct in turn, i.e. percentage zero returns, then the measures of Liu (2006) and
Amihud (2002) and finally the turnover construct. The last regression uses the market control
variables in addition to all the liquidity constructs together.

5.2

Contrasting the liquidity measures: Vuong likelihood ratio test

A useful likelihood ratio test for model selection in the absence of specifying a null
hypothesis that either model is true is outlined in Vuong (1989) and applied within this
context in Lesmond (2005). The model effectively tests the null hypothesis that either model

12

is equally as good at explaining the underlying abstract data generating process with an
alternate hypothesis that one is better than the other. The likelihood ratio Z-score test statistic
indicates whether the reference model is better at explaining the comparison model with a
one-sided probability. The reference models in this case are either the Amihud or turnover
liquidity measures, and the comparison models are the Stoll (2000) variables and separately
percentage zero daily returns as well as the Liu measure. Turnover is a comparison model in
the Amihud reference model tests while Amihud features as a comparison model in the
turnover reference model tests. A positive and significant one-sided probability indicates that
the Amihud or the turnover measure is more highly associated, or statistically superior to the
competing liquidity measures. Lesmond (2005) asserts that a positive sign for the Z-score test
statistic usually indicates the reference model has a higher R2 regression statistic than the
competing models.
The Vuong (1989) likelihood ratio test is specific for non-nested model selection in
testing whether a reference model and comparison model do equally well at explaining the
underlying data. The reference model is either the Amihud measure or alternatively the
turnover measure, which is a measure of trading frequency, and the comparison models are
the remaining liquidity measures, i.e. Liu and the liquidity determinants of Stoll (2000). Each
of the comparison models are tested independently against the reference Amihud or turnover
measure with each individual regression stated as:

Reference Model:

S + Cj = 0 + 1 (reference liquidity measurej) + j,

Comparison Model 1: S + Cj = 0 + 1 other liquidity measure(s)j + j, and

Comparison Model 2: S + Cj = 0 + 1 pricej + 2 volumej +

3 j2

+ 4 sizej + j,

(6)
(7)
(8)

where S + Cj refers to the average, proportional bid ask spread plus commission cost for each
firm-month j within each country. The comparison liquidity measures are those of Liu (2006).
Price is the average annual daily stock price in local currency, and volume is the average
annual daily trading volume. j2 is the daily average volatility. Size is the monthly market
capitalization and is defined as the share price times the number of shares outstanding. Share
price is measured at the beginning of each month, while number of shares outstanding is
measured at the beginning of the year.
The basis of the test is a likelihood ratio of the log likelihood function for the
reference model to the log likelihood function for the comparison model. Using R to
represent the reference model and C to represent the comparison model:

f S + C | Z i ;n
n
LRn , LRn LCn ( ) = i =1 log
,
g (S + C | Z i ; n )

( )

()

13

(9)

Where LRn is the likelihood ratio function for n firm-month observations in each country. Zi
is a vector of m independent standard normal variables, n is the maximum likelihood
parameter estimates for the reference model, and n is the maximum likelihood parameter
estimates for the comparison model. The variance of the likelihood function is given by
Vuong as

n2 =

2
2
2
1 n 1
1 Cj Rj 1

2
2
[log C log R ] + 2 2 2 2 LRn
n j 2
R
C

( )

( )

(10)

where is the residual using the fitted parameters for either the Amihud regression case of the
comparison model case. Vuong shows that the likelihood ratio statistic converges to a normal
distribution:
Under H0 : n 1 / 2

LRn n , n D
N (0,1)
n2

(11)

The resultant test statistic is stated as

Z=

1 LRn n , n
n
n

(12)

A one-sided Z-statistic tests whether either of the reference models, in this case being either
the Amihud or Turnover measure, is more highly associated with the underlying S + C cost
than the comparison model(s). The test is directional, given by a positive or negative Zstatistic, indicating which model is more highly associated with the underlying S + C cost. A
positive and significant Z-statistic indicates that the reference measure is more highly
associated with the underlying S + C cost than the comparison measure(s). A negative and
significant Z-statistic indicates the comparison measure is more highly associated with the
underlying S + C cost.
Alternatively, the Z-statistic can be obtained from a linear regression if the log ratio is
defined at every month j as
2
2
C2 1 Cj Rj
1
m j = log 2 + 2 2
2
R 2 C R

(13)

Vuong states that a useful abstraction of the test statistic in above equation 1 LRn ( n , n ) is
n

numerically equal to [(n-1)/n]1/2 times either the usual t-statistic on the constant term in a
linear regression of mj on only the constant term, or the usual t-statistic on the coefficient of
mj in a linear regression of one on mj. Stated another way, the Z-statistic can be obtained by
regressing mj on unity and multiplying the t-statistic from this regression by [(n-1)/n]1/2. This

14

procedure involving the running of two subsequent sets of regressions is employed in this
paper.

6.

RESULTS AND DISCUSSION

6.1

An assessment of liquidity measures ability in explaining total costs

The regression results are reported in Table 7 for six emerging African markets and the two
European markets of London and Paris. In all cases the sign of the market control variables is
of the expected direction i.e. negative for price and volume and positive for volatility which is
in line with theory (Stoll, 2000 and Lesmond, 2005). However there are considerable
differences in levels of statistical significance. Price is not significant in the results for Paris
and Egypts CASE 30 index constituents. Price and volatility are not significant for the top
ten firms in Tunisia while these variables are largely significant for the Tunisian aggregate
market providing further indication of the substantial differences in market microstructure
within each market. Volatility is not significant in the aggregate Egyptian market while firm
size is not significant for Egypts CASE 30 constituents and South Africas JSE Top 40
constituent stocks. This latter finding is likely the result of considerable heterogeneity in firm
size across the aggregate market with firms that are in the top tier being largely the same size.
Including the liquidity constructs within the regressions in a sequential manner
reveals that while almost all measures are statistically significant and result in increases in
explanatory power of the models for the aggregate markets there are considerable differences
between the overall market and the top tier firms. In the case of Morocco CFG 25, Kenyan
NSE 20 constituents and the top ten Tunisian firms the Liu construct is significant. Egypts
CASE 30 constituents register significance for the percentage daily zero returns price rigidity.
In the case of South Africas JSE Top 40 the percent zero daily returns, Amihud and Liu
measures are significant while in the case of the top ten firms in BRVM no measures are
significant although the percent zero daily returns construct does show significance at the
90% confidence level. However the greatest explanatory power, measured by the R2 statistic,
across all models and markets is found for the percentage zero daily returns and the Liu
construct.
Further evidence concerning the differences between the aggregate market
performance and that of the top tier market sub-group is seen from the results of the grand
regressions including all the Stoll (2000) market control variables and all four of the liquidity
constructs. The regression models show considerable resiliency in respect of all of the
liquidity measures together with occasional exceptions such as the lack of significance in the
percentage zero daily returns term for Tunisia and Liu measure for South Africa. Equally the
liquidity coefficients are relatively invariant between the individual prior regressions and
those of the grand regression. The percentage zero daily returns and Liu coefficients are

15

relatively constant at 0.0004 and 1.48E-05 respectively for Egypt and are 0.0005 and 0.0011
for BRVM. These results indicate that the percentage zero daily returns and Liu measures,
where significant, are robust liquidity estimators when used within each country on an
aggregate basis.
Table 7

6.2

Contrasting the liquidity measures: Vuong likelihood ratio test

The regression based tests indicate that the percentage zero daily returns and Liu liquidity
constructs have increased explanatory power and robustness over the other market control
variables and liquidity proxies. The benefits of using the Vuong (1989) maximum likelihood
ratio test arise from the common dependent variable in all the prior regressions which is the
total trading costs, or bid-ask spread plus commissions. While the regression based tests are
useful in outlining differences between models containing different liquidity constructs, as
indicated through increases in explanatory power, or R2, these do not provide reliable
evidence of which liquidity measure is more highly associated with total trading costs.
The results in Table 8 indicate that the Amihud construct is significantly less
associated with the total trading costs measure than any of the competing liquidity measures
and even the Stoll (2000) market control variables for the markets of Egypt, Tunisia, South
Africa and BRVM. In these cases the coefficients are negative and significant. The sole
exception where the Amihud construct is statistically significant than both the turnover and
Liu constructs is in the OECD market of London where it is statistically superior to these
constructs at the 99% level of confidence.
In contrast the turnover measure outperforms the Liu construct in the case of London
and Egypt and a 95% confidence level. It also outperforms percentage zero daily returns for
the Tunisian market at a similar confidence level. However including the Amihud measure,
within the group comparison model that combines all competing liquidity measures except
that of the reference model, the turnover construct shows reduced power in explaining total
trading costs. This is shown by the last column of Table 8 where coefficients are both
negative and significant indicating the poor performance of the turnover measure against
percentage daily zero returns, Amihud and Liu constructs. Similarly the turnover measure
underperforms against the Stoll (2000) market control variables.
Overall this offers some evidence that the turnover measure is more highly associated
with the total trading costs than competing measures. The evidence suggests that the
performance of turnover measure across markets is preferable to that of Amihud indicating
that the use of the turnover measure is preferable to the Amihud construct. However neither

16

measure shows definite statistical superiority to the percentage zero daily returns nor Liu
constructs on an inter or intra-market basis.
Table 8

7.

CONCLUSIONS

This study assesses the efficacy and robustness of four liquidity measures in measuring firmlevel liquidity within and between six emerging African markets, Egypt, Tunisia, Morocco,
BRVM, Kenya and South Africa and the two European markets of London and Paris. The
liquidity estimators considered are turnover, which is a volume based measure, the Amihud
construct (Amihud, 2002), the Liu construct (Liu, 2006) and percentage daily zero returns,
which is a price-rigidity measure. The bid-ask spread measure of trading costs indicates
considerable differences in aggregate market liquidity costs with 0.15% in Morocco to
53.37% in Tunisia. There is also considerable variation in liquidity costs on an intra-market
basis with differences of 100% between the South African aggregate market and the
prestigious JSE Top 40 index constituents.
Tests of each liquidity constructs ability to represent the total trading costs, itself
combination of bid-ask spread and trading commissions, utilize a variety of panel regressions
and a likelihood ratio test. The findings indicate that while Amihud outperforms the turnover
and Liu measures in London alone, turnover is statistically superior in contrast to Liu in
London and Egypt, and to percentage zero daily returns in Tunisia. However on an overall
basis the percentage zero daily returns price-rigidity measure and the Liu volume based
measures demonstrate greater levels of explanatory power and robustness on an inter and intra
market basis. As such either the percentage zero daily returns or Liu measures would assist
investment managers in modelling the effects of liquidity and in forming liquidity premiums
and exploit diversification opportunities in Africas emerging markets.

17

References
African Business. 2005. http://www.africasia.com/africanbusiness/ IC Publications
Bekaert, G., Harvey, C., & Lundblad, C. (2003). Liquidity of emerging markets: lessons from
emerging markets. Unpublished working paper. Duke University, North Carolina.
Bocoum, A., D. (2009) Interview with Amadou Djeri Bocoum, Director, Antennae de Bourse
de BRVM, Bamako, Republic of Mali. 2 January 2009.
Bourse de Casablanca website (2009). Bourse de Casablanca, Morocco.
http://www.casablanca-bourse.com/ Accessed on 10 February 2009
Bourse de Tunis website (2009). Bourse de Casablanca, Morocco.
http://www.bvmt.com.tn/ Accessed on 10 February 2009
BRVM website (2009). Bourse Regionale des Valuers Mobilieres de lAfrique de lOuest,
Cote dIvoire. http://www.brvm.org/fr/index.htm Accessed on 10 February 2009
CASE website (2009). Cairo and Alexandria stock exchange, Cairo, Egypt.
http://www.egyptse.com/ Accessed on 10 February 2009
Daniel, K., & Titman, S. (1997). Evidence on the characteristics of cross sectional variation in
stock returns. Journal of Finance, 52, 1-33
Fama, E., and French, K. (1993). Common risk factors in the returns on stocks and bonds.
Journal of Financial Economics, 33, 3-56.
JSE website (2009). Johannesburg Stock Exchange, Johannesburg, South Africa.
http://www.jse.co.za/ Accessed on 10 February 2009
Lavelle, K. (2001). Architecture of Equity Markets: The Abidjan Regional Bourse,
International Organization, 55:3, 717-742.
Lesmond, D., A. (2005). Liquidity of emerging markets. Journal of Financial Economics, 77,
411-452.
Liu, W. (2006). A Liquidity-augmented capital asset pricing model. Journal of Financial
Economics, 82, 631-671.
NSE website (2009). Nairobi Stock Exchange, Nairobi, Kenya. http://www.nse.co.ke/newsite/
Accessed on 10 February 2009
OHara, M. (2003). Presidential address: liquidity and price discovery. Journal of Finance, 58,
1335-1354
Pastor, L., & Stambaugh, R. (2003). Liquidity risk and expected stock returns. Journal of
Political Economy, 111, 642-685
Sissoko, A. (2009) Interview with Alassane Sissoko, Investor Relations, SGI-Mali,
Bamako, Republic of Mali. 2 January 2009.
Stoll, H. R. (2000). Friction. The Journal of Finance, 55(4), 1479, 1478, 1480-1514.
Vuong, Q. (1989). Likelihood ratio tests for model selection and non-nested hypotheses.
Econometrica, 307-333.

18

Zribi, H. (2008) Interview with Hatem Zribi, Market Development, Bourse de Tunis, Tunisia.
18 January 2008.

19

Table 1. Trading Statistics on Selected African Stock Exchanges - 2005

Market

Established

Market
capitalisation
(current US$ mil)

Market
capitalisation as
% of GDP

Stocks traded,
turnover ratio
(%)

Panel 1: Individual Country statistics

South Africa
1887
566,972.33
232.7
42.12
Egypt (Alexandria/ Cairo)
1888/1903
80,050.00
85.21
35.20
Morocco
1929
27,280.66
51.17
14.87
Nigeria
1960
15,134.36
24.69
10.69
Botswana
1989
13,399.60
148.86
1.80
Kenya
1954
5,860.04
32.00
7.90
Tunisia
1969
2,853.11
10.32
16.04
Cote d'Ivoire (BVRM)
1973/1998
2,787.58
79.97
1.33
Mauritius
1988
2,645.90
40.23
5.68
Zambia
1994
2,456.00
26.55
0.63
Zimbabwe (2000)
1896
1,941.00
33.73
10.80
Ghana
1990
1,660.58
15.49
4.12
Uganda (2006)
1998
742.00
32.73
0.02
Tanzania
1998
587.86
4.67
4.08
Namibia
1992
414.94
6.67
128.29
Swaziland
1990
197.09
7.50
0.0026
Malawi
1996
101.93
5.36
1.98
Mozambique
2001
28.77
0.45
0.08
Sudan (2003)
1995
0.08
0.001
12.65
Panel 2: Regional statistics
UK
-- -5,022,868.20
Africa
100.00%
758,992.14
Sub-Saharan Africa
85.48%
648,808.38
South Africa
74.70%
566,972.33
North Africa
14.52%
110,183.77
(Egypt, Morocco, Tunisia)
Sub-Saharan Africa
10.78%
81,836.05
(ex South Africa)
Source: Compiled by authors from national stock exchange websites and IFC Statistics database.
Notes: (1) Where Market Capitalisation data is unavailable for 2005 the date of the value used is in
parentheses in column 1.
(2) Two dates for the Cote dIvoire exchange indicate transition in October 1998 from former
national stock exchange in Abidjan to new Francophone West African regional exchange.

20

Table 2. Market descriptive statistics

1998

1999

2000

2001

2002

2003

2004

2005

2006

18,380.80
19,996.35
2,291.20
4.89
43.36

4,495.98
4,273.22
5,919.60
18.65
0.00

4,726.75
2,772.77
1,680.60
0.00
0.00

6,119.32
11.56
0.00
0.00
0.00

8,282.97
6,725.70
819.40
0.00
0.00

16,385.53
16,759.69
1,791.80
0.00
746.26

31,666.32
6,938.73
33,355.60
189.45
225.84

110.36
36.20

10.76
0.00

0.00
0.00

0.00
5.78

1,185.31
0.00

43.28
0.00

425.61
0.00

Panel 2: Ratio of Stock Market capitalization to GDP (%)

London
164.31
199.58
187.38
Paris
257.53
441.72
431.21
South Africa
134.90
198.63
168.25
Kenya
14.64
11.29
11.20
Egypt
24.66
30.83
35.21
Tunisia
11.45
13.01
14.59
Morocco
42.19
39.95
30.90
BRVM
13.55
12.79
10.97

151.85
355.20
173.59
10.78
24.53
11.39
25.67
10.87

108.72
241.65
107.95
8.25
25.42
8.90
20.66
10.21

121.25
273.05
141.76
32.68
44.44
9.23
25.95
11.53

123.34
279.21
183.92
22.95
51.84
8.78
43.63
12.84

236.25
350.61
232.70
32.00
85.21
10.32
51.17
17.97

268.70
411.50
289.56
48.20
86.63
13.32
77.42
23.43

Mean English common law*

Mean French civil code*

64.51
41.34

48.03
32.29

57.31
39.16

61.83
47.34

79.42
67.17

95.19
91.79

Panel 3: Ratio of Stock Market capitalization to Banking system size (Money-plus-Quasi Money/ M3) (%)
London
174.96
219.77
194.42
148.97
107.64
117.08
Paris
112.70
161.49
145.98
108.73
85.50
114.59
South Africa
238.75
347.38
311.03
304.50
201.70
248.81
Kenya
40.89
31.58
31.84
31.42
21.85
85.02
Egypt
32.02
40.55
45.88
29.78
28.94
45.52
Tunisia
23.78
24.85
26.38
20.07
16.68
16.40
Morocco
59.26
51.14
39.20
31.35
24.52
29.90
BRVM
210.70
207.01
169.25
166.05
129.84
152.15

115.29
122.79
328.34
59.35
53.64
15.28
49.59
166.09

204.50
127.13
382.66
84.54
87.76
17.13
53.15
226.64

217.44
158.07
443.91
122.62
88.99
21.95
75.16
289.10

Mean English common law*

Mean French civil code*

115.44
63.76

150.00
79.03

161.37
98.66

Panel 1: New Listings capital raised (US$ Millions)

London
5,694.21
7,964.93
Paris
45,137.74
7,127.13
South Africa
6,083.80
960.60
Kenya
0.00
5.78
Egypt
225.78
174.58
Tunisia
Morocco
-- --- -BRVM
391.31
104.77

65.91
34.80

104.32
83.19

96.20
44.66

108.52
88.86

92.02
39.54

119.25
77.24

99.24
55.75

83.90
46.20

89.53
57.17

Source: Compiled by authors from National stock exchange websites and direct sources from stock exchanges. Bloomberg used for UK and France
Notes: (1) *Indicates mean values constructed for all African stock markets including UK and France

21

Table 3. Market Capitalisation and Turnover profiles, 2008

London
FTSE100
102

Total Number of Listed Firms

Market Capitalisation
Top 1 Firm Market Capitalisation to total (%)
7.50
Top 5 Firms Market Capitalisation to total (%)
29.96
Top 10 Firms Market Capitalisation to total (%)
45.34
Top 20 Firms Market Capitalisation to total (%)
65.53
Turnover
Top 1 Firm Turnover value to total (%)
5.72
Top 5 Firms Turnover value to total (%)
23.77
Top 10 Firms Turnover value to total (%)
41.30
Top 20 Firms Turnover value to total (%)
61.10
Sector Concentration by Market Capitalization
Financials
-- -Communications
-- -Basic Materials (Mining etc)
-- -Consumer cyclical
-- -Consumer non-cyclical
-- -Diversified
-- -Energy
-- -Industrial
-- -Technology
-- -Utilities
-- -Source: Compiled by authors from Bloomberg
Notes: (1) * Refers to Central Market and Block Trading Market

Paris
CAC40
40

Morocco*

Tunisia

Egypt

BRVM

South Africa

Kenya

78

53

302

39

373

46

10.58
37.64
58.96
81.06

27.55
57.81
74.29
88.88

12.51
43.56
65.23
88.20

7.43%
29.64%
43.58%
59.69%

46.51
71.49
84.50
96.29

8.31%
30.36%
45.44%
62.31%

21.02%
63.67%
78.79%
94.31%

8.98
33.63
51.81
74.54

19.42
58.92
78.00
92.01

9.69
38.19
61.98
86.51

11.50%
36.81%
55.31%
78.67%

53.95
89.53
95.54
98.70

12.74%
42.19%
59.67%
76.28%

20.44%
56.73%
74.76%
95.78%

-- --- --- --- --- --- --- --- --- --- --

42.04%
27.55%
3.37%
2.55%
4.35%
7.39%
1.46%
9.93%
0.14%
1.23%

57.38%
0.31%
3.89%
12.16%
8.92%
12.51%
0.38%
4.45%
-- --- --

24.72%
18.22%
14.63%
5.00%
6.59%
1.57%
1.03%
18.86%
0.12%
0.18%

7.13%
46.36%
0.53%
2.81%
25.49%
-- -3.08%
12.23%
-- -2.37%

28.11%
14.09%
23.86%
6.52%
6.63%
4.27%
9.50%
5.58%
0.31%
0.00%

46.90%
0.96%
1.63%
4.73%
26.95%
0.08%
4.41%
14.33%
-- --- --

22

Table 4. Market Microstructure characteristics for BRVM antennae de bourse in Mali

Investors
Individual

Variable
Mean trade size for Equities
Mean trade size for Bonds

Order Type
Purchase
Sale
Purchase
Sale

Number Individual investors

Proportion of activity by single most active
individual
Institutions

Mean trade size for Equities

Mean trade size for Bonds

Total Individuals
Total Institutions

Number of Certificates
Number of Certificates

Total

Total traded Equities

Total traded Bonds

Purchase
Sale
Purchase
Sale

Purchase
Sale
Purchase
Sale

2005
558 [20]
350 [19]
0 [0]
146 [11]

2006
1,173 [47]
80 [12]
1,490 [2]
80 [1]

2007
11,263 [18]
5,342 [30]
0 [0]
542 [3]

2008
5,800 [15]
24,855 [26]
1,000 [1]
167 [4]

21

11

12

12

37.58%

93.27%

98.09%

87.51%

0 [0]
0 [0]
431 [18]
300 [1]

69 [2]
0 [0]
187 [3]
400 [1]

2,226 [9]
260 [2]
503 [3]
35 [1]

9,150 [11]
22,294 [7]
0 [0]
34 [1]

19,428 [50]
8,060 [19]

59,141 [62]
1,097 [6]

10,330 [49]
22,102 [15]

710,030 [45]
256,741 [19]

11,163 [20]
6,655 [19]
7,760 [18]
1,910 [12]

55,256 [49]
962 [12]
3,460 [4]
560 [3]

222,765 [27]
5,862 [32]
1,510 [3]
2,745 [6]

187,647 [26]
777,423 [32]
1,000 [1]
701 [5]

0.29
51.03
0.56%

0.41
79.36
0.52%

0.47
150.43
0.31%

Traded value Equities (Mali) UK(m)

0.46
Traded value Equities (BRVM) UK(m)
16.67
% of total traded value on BRVM
2.76%
Source: Compiled by author from Societe de Gestion et d'Intermdiation (SGI), Bamako, Mali
Notes: (1) Square brackets indicate the number of matched trades undertaken on annual basis
(2) Bonds includes both Malian and UMEAO sovereign treasury and corporate instruments
(3) All investors are Malian and are either resident in Mali or France
(4) Traded Value denominated in millions GBP (UK)

23

Table 5. Summary Statistics

Six sample group markets comprising of five emerging West African markets (Morocco, Tunisia, Cote dIvoire, Ghana and Nigeria) and two developed OECD markets
(UK and France). Datastream provides the daily prices, volume and market capitalization information. Start refers to the beginning date of the daily security return data up
to the final year 2007. Price is the average of daily prices over each month and is stated in domestic currency and converted to UK using the average exchange rate for
each month and country. Volume is the average of the daily trading volume over each month and is stated in thousands. Market capitalization is measured as of 1 January
for each country and is equity market value for each firm expressed in millions of local currency or UK. The bid-ask spread is generated through
( Ask M Bid M ) ( Ask M 1 Bid M 1 ) applied to respective monthly bid and ask prices for individual stocks. The monthly average is taken across
+

Quoted spread = 1 / 2
M

( Ask M + Bid M ) / 2 ( Ask M 1 + Bid M 1 ) / 2

all stocks to obtain a market wide measure, for which an annual mean is calculated. The UK market capitalization is derived using the end of month exchange rate for
each country and month. Square parentheses indicate median values for each variable.
Local market
UK equivalent
Country
Start
No. Firms by
Zero Return
Price
Volume
Market
Price
Market
Bid-Ask spread
trading activity
(%)
(thousands)
Capitalization
Capitalization
(millions)
(millions)
Europe
London
12.04
537.89
193,989.62
9,275.19
537.89
9,275.19
0.0085
1991
101
(FTSE 100)
[11.93]
[539.20]
[141,919.17]
[9,959.53]
[539.20]
[9,959.53]
[0.0089]
7.13
37.37
635.78
8,793.01
25.66
8,817.09
0.0042
Paris (CAC 40)
1991
40
[6.26]
[35.52]
[542.28]
[5,342.61]
[24.59]
[8,322.69]
[0.0039]
Africa
12.08
6,396.31
833,115.17
3,597,643.37
5.23
2,727.59
0.0070
2000
JSE Top 40
[11.29]
[5,031.43]
[877,973.40]
[26,019,557.48]
[4.17]
[21,984.15]
[0.0080]
South Africa
45.44
1,832.36
1,846,339.16
698,166.17
1.56
529.35
0.1007
2000
273
[45.11]
[1,375.33]
[1,635,892.97]
[4,991,884.70]
[1.41]
[4,215.62]
[0.1038]
46.22
38.59
156,093.29
0.31
63.98
0.036
1995
NSE Top 20
-- -[48.25]
[24.31]
[53,924.00]
[0.24]
[210.78]
[0.0353]
Kenya
0.38
31.88
0.035
60.31
45.01
174,106.53
-- -1995
37
[59,870.70]
[0.36]
[145.32]
[0.0362]
[61.63]
[41.10]
29.67
23.48
16,643.17
2.42
498.57
0.0029
1998
CASE Top 30
-- -[31.67]
[11.96]
[15,417.86]
[1.29]
[160.11]
[0.0024]
Egypt
50.92
42.05
6,027.75
1,535.97
4.31
162.45
0.0562
1998
121
[53.24]
[44.83]
[4,760.21]
[789.51]
[4.86]
[117.44]
[0.0606]
56.68
797.65
6,531.81
7,859.82
51.27
517.76
0.0015
1993
CFG Top 25
[54.35]
[825.83]
[4,821.75]
[5,615.37]
[51.36]
[370.01]
[0.0000]
Morocco
66.43
616.07
7,071.77
4,045.14
39.62
263.65
0.0054
1993
40
[66.67]
[635.06]
[5,205.65]
[3,077.26]
[39.75]
[200.44]
[0.0000]

24

51.33
36.42
648.06
[50.44]
[33.20]
[457.64]
Tunisia
64.97
34.65
1,084.96
1991
37
[66.04]
[32.02]
[835.74]
83.86
27,191.23
110.87
1998
Top 10
[85.45]
[22,992.42]
[34.42]
BRVM
89.65
21,727.78
131.38
1998
33
[90.47]
[19,088.84]
[62.19]
Source: Compiled by author from Bloomberg, Datastream and National stock exchanges
1991

Top 10

25

187.80
[187.01]
58.59
[48.28]
89,600.37
[52,242.39]
35,810.08
[27,313.47]

20.21
[17.57]
18.93
[16.02]
28.54
[23.49]
22.59
[18.93]

98.03
[91.49]
103.70
[95.10]
95.42
[54.56]
37.85
[27.51]

0.185
[0.1977]
0.5337
[0.6913]
0.0857
[0.0817]
0.0592
[0.0589]

Table 6 Spearmans Rank Correlations

This table reports the descriptive statistics and Spearman rank correlation for the main variables employed in this study on a country by country basis. In line with Stoll
(2000) the natural logarithms are taken of the variables for price, market capitalisation and volume, while volatility remains untransformed and is the monthly average of
daily price variance. Price is the average of daily prices over each month and is stated in local currency units. Volume is the average of the daily trading volume over each
month and is stated in thousands. MV or market capitalization is measured as of 1 January for each country and is equity market value for each firm expressed in millions
of local currency units. Four liquidity measurement variables are presented. Amihud is the liquidity measure of Amihud (2002), which is defined as the daily ratio of the
absolute return on a day to the UK trading volume for that particular day averaged over the past 1 month and provides a measure of the price impact. Liu is the measure
of Liu (2006) and represents a standardized turnover-adjusted number of zero returns over the prior month. Turnover is a ratio of the traded volume of shares in relation to
total number of shares outstanding and is scaled by the number of trading days in the month of measurement. It provides a measure of trading frequency. The final
measure is the Bid Ask spread which is the average daily relative bid ask spread over the prior 1 month, where daily relative spread is the UK denominated spread divided
by average of Bid and Ask prices. At the end of each month for the maximum period of data availability for each country cross sectional averages for each variable are
calculated over the stocks in each respective market, namely Egypt, Morocco, Kenya, South Africa, London and Paris. Likewise at the end of each month the cross
sectional Spearmans rank correlation are computed and the time series average of those correlations are reported.
Panel A: Results for London (FTSE 100 constituent companies) (1991M01 2007M12)
Liu
% Zero
Price
Volatility
Volume
MV
Amihud
Turnover
Bid Ask
Returns
Spread
Liu
100.00%
-- --- --- --- --- --- --- --- -% Zero Returns
1.16%
100.00%
-- --- --- --- --- --- --- -Price
38.24%
-27.89%
100.00%
-- --- --- --- --- --- -Volatility
-22.97%
-10.92%
-14.45%
100.00%
-- --- --- --- --- -Volume
-33.93%
-26.59%
-26.55%
13.49%
100.00%
-- --- --- --- -MV
17.20%
-41.98%
40.19%
-9.99%
100.00%
-- --- --- -66.10%
Amihud
-2.27%
37.00%
-39.31%
17.41%
100.00%
-- --- --69.00%
-92.73%
Turnover
-0.58%
-38.87%
23.00%
33.62%
-17.81%
2.89%
100.00%
-- --99.50%
Bid Ask Spread
-8.35%
39.24%
-46.32%
22.80%
8.93%
100.00%
-50.10%
-82.25%
84.37%
Panel B: Results for Paris (CAC 40 constituent companies) (1992M01 2007M12)
Liu
% Zero
Price
Volatility
Volume
MV
Amihud
Turnover
Bid Ask
Returns
Spread
Liu
100.00%
-- --- --- --- --- --- --- --- -% Zero Returns
7.97%
100.00%
-- --- --- --- --- --- --- -Price
22.52%
0.03%
100.00%
-- --- --- --- --- --- -Volatility
3.07%
-10.25%
-9.39%
100.00%
-- --- --- --- --- -Volume
-25.72%
-15.14%
22.79%
-4.36%
100.00%
-- --- --- --- -MV
42.98%
-12.23%
39.77%
2.04%
100.00%
-- --- --- -66.11%
Amihud
22.27%
9.95%
-26.45%
27.16%
100.00%
-- --- --91.68%
-62.05%
Turnover
-6.84%
-23.67%
-3.44%
26.64%
-43.26%
-22.09%
100.00%
-- --98.36%
Bid Ask Spread
15.41%
20.38%
-18.39%
18.29%
-49.55%
-17.08%
100.00%
-70.15%
70.79%

26

Panel C: Results for Egypt (1997M01 2007M12)

Liu
% Zero
Returns
Liu
100.00%
-- -% Zero Returns
100.00%
60.76%
Price
15.71%
-11.91%
Volatility
-30.43%
-21.85%
Volume
-61.51%
-80.46%
MV
-4.53%
-46.05%
Amihud
54.52%
50.58%
Turnover
-96.06%
-50.17%
Bid Ask Spread
56.14%
50.54%
Panel D: Results for Morocco (1993M08 2007M12)
Liu
% Zero
Returns
Liu
100.00%
-- -% Zero Returns
42.37%
100.00%
Price
21.32%
2.87%
Volatility
7.01%
-20.13%
Volume
-47.02%
-62.62%
MV
-16.04%
-47.58%
Amihud
19.58%
-5.62%
Turnover
-13.63%
-67.64%
Bid Ask Spread
11.69%
12.44%
Panel E: Results for Kenya (1995M10 2005M03)
Liu
% Zero
Returns
Liu
100.00%
-- -% Zero Returns
100.00%
81.30%
Price
21.90%
17.61%
Volatility
-13.32%
-31.98%
Volume
-74.56%
-59.24%
MV
-22.78%
-22.58%
Amihud
27.28%
1.04%
Turnover
-49.58%
-35.02%
Bid Ask Spread
24.77%
14.82%

Price

Volatility

Volume

MV

Amihud

Turnover

-- --- -100.00%
-20.27%
-19.02%
49.17%
-20.67%
-18.93%
12.94%

-- --- --- -100.00%

17.75%
-17.65%
20.17%
33.18%
5.30%

-- --- --- --- -100.00%

42.75%
-71.15%
77.08%
-45.21%

-- --- --- --- --- -100.00%

-58.97%
-4.91%
-15.84%

-- --- --- --- --- --- -100.00%

-47.46%
54.96%

-- --- --- --- --- --- --- -100.00%

-37.14%

Price

Volatility

Volume

MV

Amihud

Turnover

-- --- -100.00%
-9.85%
-28.86%
25.09%
-37.12%
-34.84%
6.06%

-- --- --- -100.00%

-8.05%
-13.81%
57.78%
-6.47%
6.77%

-- --- --- --- -100.00%

54.12%
-19.48%
62.29%
-16.25%

-- --- --- --- --- -100.00%

-32.71%
-7.80%
-13.34%

-- --- --- --- --- --- -100.00%

-14.23%
6.81%

-- --- --- --- --- --- --- -100.00%

-12.01%

Price

Volatility

Volume

MV

Amihud

Turnover

-- --- -100.00%
-16.19%
-48.58%
60.41%
-15.66%
-46.58%
7.78%

-- --- --- -100.00%

13.01%
-6.52%
52.13%
7.83%
23.62%

-- --- --- --- -100.00%

-4.35%
-29.09%
79.03%
-22.23%

-- --- --- --- --- -100.00%

-20.51%
-45.67%
-6.02%

-- --- --- --- --- --- -100.00%

-25.99%
27.21%

-- --- --- --- --- --- --- -100.00%

-16.58%

27

Bid Ask
Spread
-- --- --- --- --- --- --- --- -100.00%
Bid Ask
Spread
-- --- --- --- --- --- --- --- -100.00%
Bid Ask
Spread
-- --- --- --- --- --- --- --- -100.00%

Panel F: Results for South Africa (1996M04 2007M12)

Liu
% Zero
Returns
Liu
100.00%
-- -% Zero Returns
100.00%
79.08%
Price
-47.35%
-65.32%
Volatility
9.20%
8.32%
Volume
-83.00%
-77.05%
MV
-47.82%
-71.72%
Amihud
21.97%
26.47%
Turnover
-74.32%
-50.75%
Bid Ask Spread
77.44%
85.34%
Panel G: Results for BRVM (1996M04 2007M12)
Liu
% Zero
Returns
Liu
100.00%
-- -% Zero Returns
100.00%
57.35%
Price
-14.57%
-13.44%
Volatility
-17.60%
-50.62%
Volume
-48.53%
-71.66%
MV
-42.46%
-31.61%
Amihud
10.38%
-31.64%
Turnover
-37.31%
-55.12%
Bid Ask Spread
7.26%
9.05%
Panel H: Results for Tunisia (1996M04 2007M12)
Liu
% Zero
Returns
Liu
100.00%
-- -% Zero Returns
100.00%
80.51%
Price
-3.72%
-0.15%
Volatility
-10.86%
-34.78%
Volume
-80.17%
-71.23%
MV
-47.00%
-37.95%
Amihud
32.05%
52.48%
Turnover
-71.46%
-64.01%
Bid Ask Spread
45.77%
30.82%

Price

Volatility

Volume

MV

Amihud

Turnover

-- --- -100.00%
-34.35%
36.86%
85.48%
-27.84%
19.43%
-71.43%

-- --- --- -100.00%

-4.85%
-28.10%
13.79%
1.71%
30.83%

-- --- --- --- -100.00%

52.87%
-24.12%
72.51%
-76.98%

-- --- --- --- --- -100.00%

-30.15%
7.17%
-76.77%

-- --- --- --- --- --- -100.00%

-13.21%
29.52%

-- --- --- --- --- --- --- -100.00%

-49.50%

Price

Volatility

Volume

MV

Amihud

Turnover

-- --- -100.00%
-8.18%
2.32%
61.39%
-32.45%
10.06%
-23.79%

-- --- --- -100.00%

24.90%
3.16%
67.02%
20.26%
7.57%

-- --- --- --- -100.00%

41.74%
-8.87%
73.90%
1.56%

-- --- --- --- --- -100.00%

-25.99%
8.59%
-13.13%

-- --- --- --- --- --- -100.00%

-9.34%
8.18%

-- --- --- --- --- --- --- -100.00%

0.57%

Price

Volatility

Volume

MV

Amihud

Turnover

-- --- -100.00%
-24.37%
-9.69%
47.03%
-25.36%
-1.10%
-6.09%

-- --- --- -100.00%

13.82%
-18.99%
38.70%
20.58%
22.02%

-- --- --- --- -100.00%

50.16%
-52.09%
81.16%
-40.24%

-- --- --- --- --- -100.00%

-53.46%
13.33%
-38.40%

-- --- --- --- --- --- -100.00%

-38.69%
44.27%

-- --- --- --- --- --- --- -100.00%

-26.42%

28

Bid Ask
Spread
-- --- --- --- --- --- --- --- -100.00%
Bid Ask
Spread
-- --- --- --- --- --- --- --- -100.00%
Bid Ask
Spread
-- --- --- --- --- --- --- --- -100.00%

Table 7 Total costs on liquidity proxies and measures

The results of the panel regression tests are based on a firm-monthly basis using bid-ask spread plus commission as the dependent variable. Three liquidity measurement
variables are presented. Amihud is the liquidity measure of Amihud (2002), which is defined as the daily ratio of the absolute return on a day to the UK trading volume for
that particular day averaged over the past 1 month and provides a measure of the price impact. Liu is the measure of Liu (2006) and represents a standardized turnoveradjusted number of zero returns over the prior month. Turnover is a ratio of the traded volume of shares in relation to total number of shares outstanding and is scaled by the
number of trading days in the month of measurement. It provides a measure of trading frequency. The final measure is the Bid Ask spread which is the average daily relative
bid ask spread over the prior 1 month, where daily relative spread is the UK denominated spread divided by average of Bid and Ask prices. Firm size is determined from the
first day of each month. Volatility is the average daily stock return variance and price and volume measure the average price (local currency units) and trading volume over
an annual trading period. Turnover, price, volume, and market capitalisation are all log scaled in line with Stoll (2000). N is the sample size in firm months. The White
cross-section t-statistics are in parentheses.
Market
N
Intercept
Price
Volatility
Volume
Size
Zeros
Amihud
Liu
Turnover
Adj-R2
17,271
54.19%
London
0.0974
-0.0101
0.1600
-0.0070
-0.0010
FTSE100
[29.35]
[-27.23]
[4.78]
[-21.94]
[-2.44]
58.10%
0.0757
-0.0073
0.1886
-0.0054
-0.0012
0.0001
[31.89]
[-19.91]
[5.32]
[-15.93]
[-2.97]
[11.10]
63.92%
0.0801
-0.0080
0.1282
-0.0054
-0.0012
5.4582
[34.09]
[-24.18]
[4.34]
[-17.16]
[-3.03]
[8.54]
0.0002
54.22%
0.0972
-0.0101
0.1608
-0.0070
-0.0011
[1.19]
[29.27]
[-26.61]
[4.85]
[-21.21]
[-2.52]
55.90%
0.0832
-0.0077
0.1478
-0.0027
-0.0051
-0.0051
[35.98]
[-20.51]
[4.58]
[-4.91]
[-6.97]
[-11.31]
-0.0008
67.23%
0.0541
-0.0042
0.1413
-0.0044
0.00015
4.8977
-0.0004
-0.0042
[-1.53]
[29.33]
[-10.84]
[4.54]
[-7.47]
[10.46]
[8.4129]
[-2.7618]
[-11.73]
Paris CAC40

6,597

0.0086
[5.97]
0.0018
[0.99]
0.0108
[7.88]
0.0072
[4.25]
0.0099
[2.80]
0.0013
[0.29]

0.0006
[1.52]
7.43E-05
[0.20]
0.0005
[1.17]
-0.0001
[-0.50]
0.0006
[1.63]
-0.0003
[-0.84]

0.1810
[10.80]
0.1660
[10.93]
0.1048
[3.85]
0.1429
[9.14]
0.1813
[10.62]
0.1057
[4.69]

-0.0115
[-14.93]
-0.0084
[-16.79]
-0.0102
[-12.41]
-0.0070
[-17.89]
-0.0108
[-5.00]
-0.0108
[-4.51]

29

0.0057
[10.61]
0.0045
[10.53]
0.0048
[8.49]
0.0032
[9.88]
0.0050
[2.42]
0.0071
[3.00]

59.99%
67.09%

0.0003
[10.47]

64.27%

0.0009
[3.91]

72.81%

0.0022
[10.36]
2.58E-06
[0.06]

0.0005
[2.13]

0.0020
[6.24]

-0.0007
[-0.34]
0.0041
[1.74]

59.99%
73.87%

Market
Morocco
CFG 25

Morocco

Tunisia
Top 10

N
1,991

3,679

850

Intercept
-0.0071
[-2.46]
-0.0096
[-2.46]
-0.0078
[-2.62]
-0.0213
[-5.79]
0.0554
[6.95]
0.0584
[5.94]

Price
0.0047
[5.51]
0.0049
[5.60]
0.0049
[5.50]
0.0067
[6.78]
0.0005
[0.60]
0.0012
[1.05]

Volatility
0.3274
[4.27]
0.3326
[4.14]
0.3251
[4.23]
0.3229
[4.21]
0.3251
[4.22]
0.2919
[3.95]

Volume
0.0006
[0.81]
0.0007
[1.04]
0.0006
[0.90]
0.0028
[3.62]
-0.0104
[-6.75]
-0.0096
[-5.72]

Size
-0.0016
[-1.93]
-0.0015
[-1.74]
-0.0016
[-1.98]
-0.0026
[-3.01]
0.0079
[5.85]
0.0065
[4.70]

-0.0040
[-0.96]
-0.0037
[-0.60]
-0.0008
[-0.18]
-0.0252
[-3.70]
0.0743
[6.32]
0.0794
[5.28]

0.0098
[7.87]
0.0098
[7.09]
0.0090
[7.07]
0.0124
[7.54]
0.0036
[2.89]
0.0036
[1.96]

0.2382
[3.24]
0.2378
[3.14]
0.2468
[3.26]
0.2368
[3.23]
0.2486
[3.21]
0.2319
[3.16]

-0.0005
[-0.51]
-0.0005
[-0.50]
-0.0008
[-0.82]
0.0030
[2.37]
-0.0134
[-5.84]
-0.0124
[-4.71]

-0.0037
[-4.00]
-0.0038
[-4.11]
-0.0036
[-3.73]
-0.0051
[-4.84]
0.0071
[4.00]
0.0058
[2.96]

0.1856
[10.39]
0.1741
[7.98]
0.1844
[10.39]
0.1478
[5.45]
0.1906
[5.56]
0.1621
[3.78]

-0.0007
[-0.27]
-0.0010
[-0.40]
-0.0009
[-0.37]
0.0009
[0.37]
-0.0045
[-0.16]
-0.0092
[-0.34]

0.0980
[1.25]
0.1181
[1.32]
0.1174
[1.36]
0.1094
[1.39]
0.0996
[1.28]
0.1276
[1.29]

-0.0087
[-5.96]
-0.0079
[-4.21]
-0.0089
[-5.98]
-0.0041
[-2.02]
-0.0126
[-0.48]
-0.0146
[-0.54]

-0.0156
[-5.71]
-0.0149
[-5.38]
-0.0154
[-5.65]
-0.0143
[-4.54]
-0.0118
[-0.43]
-0.0040
[-0.14]

30

Zeros

Amihud

Liu

Turnover

1.53E-05
[0.89]

11.09%
1.66E-05
[1.13]

11.08%
12.62%

0.0005
[3.73]

-8.98E-05
[-4.99]

Adj-R2
11.09%

-1.13E-05
[-0.91]

0.0005
[3.48]

0.0102
[9.85]
0.0105
[9.85]

15.19%
16.51%
8.48%

-1.86E-06
[-0.07]

8.46%
8.62%

-7.49E-05
[-2.63]

9.55%

0.0006
[3.39]

-0.0001
[-4.86]

-0.0001
[-3.25]

0.0008
[3.65]

0.0121
[7.56]
0.0129
[8.00]

10.24%
11.89%
40.11%

4.96E-05
[1.25]

40.16%
-3.51E-07
[-1.54]

40.11%
41.59%

0.0008
[2.54]
-1.38E-05
[-0.27]

-3.46E-07
[-1.40]

0.0009
[2.22]

0.0038
[0.14]
0.0102
[0.38]

40.04%
41.47%

Market
Tunisia

BRVM
Top 10

BRVM

N
2,015

515

1,341

Intercept
0.110
[13.68]
0.0858
[9.75]
0.1107
[13.88]
0.0725
[7.72]
0.1549
[5.31]
0.1153
[3.98]

Price
-0.0103
[-3.91]
-0.0092
[-3.51]
-0.0105
[-3.89]
-0.0073
[-2.94]
-0.0437
[-1.88]
-0.0432
[-1.88]

Volatility
0.2250
[2.18]
0.2683
[2.43]
0.2394
[2.35]
0.2213
[2.18]
0.2389
[2.30]
0.2676
[2.48]

Volume
-0.0109
[-10.25]
-0.0080
[-6.94]
-0.0110
[-9.98]
-0.0045
[-3.80]
-0.0440
[-1.94]
-0.0403
[-1.78]

Size
-0.0041
[-3.86]
-0.0038
[-3.61]
-0.0040
[-3.67]
-0.0039
[-3.57]
0.0294
[1.27]
0.0320
[1.40]

0.3789
[6.57]
0.3182
[4.37]
0.3808
[6.58]
0.3690
[6.16]
0.8737
[2.09]
0.8991
[2.14]

-0.1050
[-7.63]
-0.1063
[-7.59]
-0.1055
[-7.55]
-0.1044
[-7.53]
-0.2162
[-2.41]
-0.2402
[-2.63]

0.0713
[0.24]
0.2027
[0.71]
0.0881
[0.31]
0.0622
[0.21]
0.0092
[0.03]
0.1503
[0.55]

-0.0094
[-1.96]
-0.0075
[-1.67]
-0.0098
[-1.97]
-0.0081
[-1.36]
-0.1227
[-1.31]
-0.1424
[-1.50]

0.0233
[2.31]
0.0271
[2.45]
0.0235
[2.32]
0.0233
[2.32]
0.1347
[1.48]
0.1619
[1.73]

0.2789
[8.78]
0.1883
[4.73]
0.2836
[8.89]
0.2422
[7.49]
0.6804
[2.51]
0.6981
[2.56]

-0.0729
[-8.43]
-0.0731
[-8.44]
-0.0742
[-8.54]
-0.0719
[-8.45]
-0.1640
[-2.74]
-0.1951
[-3.15]

0.1902
[1.17]
0.3867
[2.36]
0.2399
[1.49]
0.1714
[1.05]
0.1541
[0.98]
0.3907
[2.44]

-0.0056
[-1.88]
-0.0021
[-0.71]
-0.0064
[-2.17]
-0.0010
[-0.27]
-0.0978
[-1.60]
-0.1211
[-1.94]

0.0156
[2.88]
0.0192
[3.39]
0.0160
[2.94]
0.0164
[3.06]
0.1069
[1.78]
0.1415
[2.27]

31

Zeros

Amihud

Liu

Turnover

22.42%

0.0001
[6.01]

21.56%

-5.56E-07
[-2.36]

23.49%

0.0011
[5.85]
5.45E-05
[1.55]

Adj-R2
21.55%

-6.49E-07
[-2.41]

0.0009
[4.27]

0.0355
[1.47]
0.0357
[1.58]

21.66%
23.67%
19.62%

0.0004
[1.88]

19.75%
-0.00352
[-0.97]

19.49%
0.0021
[0.57]

0.0003
[1.66]

-0.00645
[-0.92]

0.0003
[0.49]

19.49%
0.1134
[1.19]
0.1365
[0.19]

19.72%
19.73%
10.79%
11.52%

0.0006
[4.79]
-0.0077
[-1.27]

10.85%
11.06%

0.0010
[2.44]

0.0005
[3.59]

-0.0141
[-2.74]

0.0011
[2.02]

0.0925
[1.49]
0.1226
[1.91]

10.97%
12.16%

Market
Egypt
CASE 30

Egypt

Kenya
NSE 20

N
1,055

5,147

1,307

Intercept
0.1308
[3.41]
0.1160
[3.58]
0.1304
[3.43]
0.1271
[3.73]
0.0860
[2.33]
0.0970
[1.85]

Price
0.0001
[0.04]
0.0061
[0.98]
-0.0001
[-0.02]
0.0037
[0.62]
0.0335
[0.99]
0.0157
[0.40]

Volatility
0.1746
[3.37]
0.1482
[3.02]
0.1800
[3.14]
0.1363
[2.49]
0.1752
[3.37]
0.1780
[2.68]

Volume
-0.0154
[-3.00]
-0.0111
[-3.14]
-0.0156
[-2.90]
-0.0090
[-4.17]
0.0179
[0.60]
0.0038
[0.09]

Size
-0.0016
[-0.82]
-0.0034
[-1.42]
-0.0015
[-0.72]
-0.0052
[-1.45]
-0.0350
[-1.08]
-0.0163
[-0.41]

0.0585
[3.17]
0.0256
[1.20]
0.0561
[3.18]
0.0643
[3.79]
0.0582
[0.92]
0.0836
[1.23]

-0.0076
[-3.94]
0.0008
[0.55]
-0.0067
[-3.54]
-0.0068
[-4.01]
-0.0074
[-0.16]
-0.0386
[-0.77]

0.2636
[1.45]
0.2612
[1.40]
0.2536
[1.41]
0.2592
[1.44]
0.2636
[1.45]
0.2475
[1.36]

-0.0180
[-7.89]
-0.0109
[-6.30]
-0.0173
[-7.91]
-0.0173
[-8.46]
-0.0178
[-0.39]
-0.0509
[-1.01]

0.0057
[2.27]
0.0038
[1.63]
0.0055
[2.30]
0.0048
[2.19]
0.0055
[0.12]
0.0442
[0.88]

0.2451
[9.16]
0.1842
[6.71]
0.2416
[9.13]
0.1319
[4.56]
0.2976
[4.31]
0.1647
[2.83]

-0.0183
[-2.51]
-0.0158
[-2.31]
-0.0159
[-2.13]
-0.0114
[-1.67]
-0.0584
[-1.23]
-0.0344
[-0.73]

0.2249
[3.36]
0.2401
[3.34]
0.1944
[2.83]
0.2290
[3.60]
0.2228
[3.35]
0.1965
[3.00]

-0.0165
[-5.15]
-0.0117
[-3.55]
-0.0150
[-4.50]
-0.0045
[-1.20]
-0.0564
[-1.25]
-0.0284
[-0.64]

-0.0154
[-4.02]
-0.0130
[-3.63]
-0.0159
[-4.15]
-0.0105
[-2.93]
0.0245
[0.55]
0.0140
[0.31]

32

Zeros

Amihud

Liu

Turnover

15.01%

0.0003
[2.21]
-3.76E-05
[-0.63]

13.89%
22.15%

9.85E-05
[1.05]

0.0001
[2.73]

Adj-R2
13.96%

-0.0004
[-0.98]

0.0001
[1.10]

-0.0333
[-1.06]
-0.0110
[-0.28]

13.90%
24.58%
20.01%
22.52%

0.0004
[7.29]

20.49%

0.0002
[2.47]

21.06%

1.51E-05
[2.91]

0.0004
[7.39]

0.0002
[2.54]

1.48E-07
[2.71]

-0.0001
[-0.004]
0.0415
[0.83]

19.99%
24.08%
7.46%
7.90%

0.0003
[2.52]
0.0034
[1.58]

7.68%
8.73

0.0030
[4.13]
-4.77E-05
[-0.30]

0.0033
[1.57]

0.0032
[4.19]

0.0397
[0.90]
0.0250
[0.56]

7.42%
8.81%

Market
Kenya

South Africa
JSE Top 40

South Africa

N
2,775

2,164

10,225

Intercept
0.2198
[10.88]
0.2061
[8.07]
0.2194
[11.00]
0.1276
[4.74]
0.2712
[4.72]
0.1963
[3.27]

Price
-0.0132
[-2.25]
-0.0133
[-2.24]
-0.0091
[-1.38]
-0.0126
[-2.15]
-0.0520
[-1.23]
-0.0496
[-1.13]

Volatility
0.2036
[3.63]
0.2058
[3.63]
0.1553
[3.18]
0.2092
[3.70]
0.1971
[3.40]
0.1435
[2.96]

Volume
-0.0149
[-6.85]
-0.0139
[-5.46]
-0.0131
[-5.35]
-0.0068
[-2.47]
-0.0535
[-1.33]
-0.0465
[-1.11]

Size
-0.0121
[-3.84]
-0.0114
[-3.69]
-0.0130
[-4.06]
-0.0069
[-2.17]
0.0265
[0.65]
0.0337
[0.81]

0.0526
[6.68]
0.0401
[4.28]
0.0527
[6.68]
0.0522
[6.69]
0.0529
[6.75]
0.0465
[6.53]

-0.0089
[-5.61]
-0.0064
[-6.13]
-0.0089
[-5.61]
-0.0074
[-7.87]
-0.0091
[-4.29]
-0.0068
[-3.74]

0.1314
[4.27]
0.1531
[4.63]
0.1313
[4.26]
0.1327
[4.19]
0.1316
[4.24]
0.1427
[4.74]

-0.0103
[-6.35]
-0.0081
[-8.24]
-0.0103
[-6.35]
-0.0087
[-10.69]
-0.0105
[-4.85]
-0.0082
[-4.83]

0.0035
[1.91]
0.0027
[1.73]
0.0035
[1.91]
0.0021
[1.73]
0.0037
[1.61]
0.0022
[1.16]

0.2141
[18.31]
0.0572
[4.45]
0.2144
[18.47]
0.1980
[12.87]
0.1981
[8.14]
0.0410
[2.06]

-0.0404
[-14.73]
-0.0254
[-9.07]
-0.0406
[-14.80]
-0.0390
[-15.62]
-0.0285
[-1.96]
-0.0173
[-1.64]

1.1309
[18.18]
1.1712
[18.77]
1.1320
[18.17]
1.335
[18.28]
1.1311
[18.22]
1.1726
[18.89]

-0.0453
[-29.16]
-0.0262
[-14.59]
-0.0453
[-29.26]
-0.0421
[-20.30]
-0.0334
[-2.27]
-0.0167
[-1.56]

0.0113
[8.41]
0.0113
[8.68]
0.0113
[8.44]
0.0106
[8.17]
-0.0005
[-0.03]
0.0029
[0.27]

33

Zeros

Amihud

Liu

Turnover

6.84E-05
[0.72]

6.10%
0.0047
[1.54]

6.63%
6.76%

0.0018
[4.30]

-0.0004
[-3.89]

Adj-R2
6.12%

0.0048
[1.58]

0.0034
[6.20]

0.0385
[0.96]
0.0417
[1.01]

6.11%
7.69%
23.22%
26.61%

0.0002
[3.32]

23.20%

-0.0808
[-2.11]

27.58%

0.0019
[2.19]

0.0001
[3.43]

-0.0408
[-1.02]

0.0014
[1.45]

0.0002
[0.23]
0.0001
[0.08]

23.19%
27.95%
54.27%
56.21%

0.0010
[17.86]

54.34%

-0.0233
[-4.16]
0.0005
[1.65]

0.0010
[12.98]

-0.0225
[-3.98]

0.0004
[1.99]

54.93%
-0.0118
[-0.81]
-0.0078
[-0.73]

54.30%
56.75%

Table 8 Likelihood ratio tests

A likelihood ratio test, developed by Vuong (1989) for non-nested model selection, is presented for each country. The models compared are based on the regressions of the
bid-ask spread and Amihud measure, defined in Amihud (2002), Turnover, defined as a ratio of the traded volume of shares in relation to total number of shares outstanding
and is scaled by the number of trading days in the month of measurement, Liu measure of liquidity, of Liu (2006) representing a standardized turnover-adjusted number of
zero returns over the prior month. Natural logarithms are taken of Traded Volume, price, and market capitalisation variables which in addition to the volatility measure,
defined as monthly average of daily stock returns, represent the underlying set of explanatory variables in Stoll (2000). A Z-statistic, using a one sided probability, is the
basis of determining if the Amihud estimate or Turnover (the reference model) is better at explaining the true bid-ask spread data generating process than alternative liquidity
proxies, or the comparison models tested either singularly or as a group. The group contains all the competing liquidity measures excluding the reference estimate. A
positive and significant Z-statistic indicates that the comparison models are rejected in favour of the reference model. These cases are in bold type. N is sample size
Market

Amihud versus
Stoll
Zeros
-3.42*
0.38
-2.93*
-1.09
-1.04
-1.02
-1.52
-2.61*
-2.05
-0.18
-2.21
-0.08
-1.70
-0.54
-1.40
0.31
-1.49
-1.51

Turnover
3.32*
-0.23
-0.86
-1.98
0.22
-0.13
0.95
0.79
-1.27

Liu
3.53*
-1.82
-0.36
0.26
-0.59
-0.86
-1.16
-0.46
-0.64

London
17,271
Paris
6,597
Egypt CASE 30
1,055
Egypt
5,147
Morocco CFG 25
1,991
Morocco
3,679
Kenya NSE 20
1,307
Kenya
2,775
South Africa
2,164
JSE Top 40
South Africa
10,225
-18.70*
-17.47*
-14.34*
-12.33*
Tunisia Top 10
850
-4.68*
-4.63*
-2.83*
-2.83*
Tunisia
2,015
-2.37*
-3.17*
-2.89*
-2.71*
BRVM Top 10
515
-3.15*
-0.37
-0.39
-0.73
BRVM
1,341
-2.81*
-0.59
-0.44
-0.62
Notes: (1) * Denotes significance at the 1% level
(2) Denotes significance at the 5% level
(3) Z critical values at 90%, 95% and 99% confidence levels are 1.28, 1.96 and 2.33

34

Group
-6.11*
-3.17*
-0.48
-2.11
-1.73
-1.26
-1.71
-2.14
-1.38

Turnover versus
Stoll
Zeros
-8.97*
-6.56*
-3.70*
-2.15
-1.16
-0.48
-0.72
-0.51
-2.05
-0.19
-2.34*
0.08
-2.27
-1.52
-2.19
-1.16
-1.45
-0.51

Liu
2.02
-2.76*
-0.22
2.09
-0.58
-1.03
-1.79
-2.09
0.33

Group
-5.57*
-3.39*
-1.16
-1.93
-1.72
-1.37
-2.11
-2.05
-1.08

-17.57*
-3.04*
-2.76*
-0.92
-0.92

-7.02*
-2.50*
0.17
-3.01*
-2.92*

1.56
-1.34
0.49
-0.13
-0.15

-7.91*
-1.49
0.46
-1.29
-1.31

-6.09*
0.26
1.65
0.15
-0.13

Appendix 1 Summary of Secondary Market regulations and fees for selected countries
Capital Gains
Tax
Other Taxes
and Fees

London
(FTSE 100)
Exempt

Paris
(CAC40)
Exempt

None

None

South Africa

Kenya

Egypt

Morocco

BRVM

Tunisia

Exempt

Exempt

Exempt

Exempt

Exempt

Exempt

VAT at commission
rate 0.5%
marketable security.
1.0% stamp duty

Withholding Tax on
Dividends is 10%
for non-residents
and 5% for
residents. Otherwise
no Capital Gains,
Stamp Duty, nor
VAT
Main Market:
Brokerage
commission
charged as follows,
Trade value < KSh
100,000 fee of
1.80%
Trade value > KSh
100,000 fee of
1.50%
0.14% of trade
value in Kenyan
Shillings applied to
buy and sell legs.
0.01% applied to
buy and sell legs for
the investment
compensation fund.

None

VAT applied to
the amount of
commissions is
10%. No other
tax/ fees.

None

None

Listed securities,
the Exchange
service fees are
levied at 0.012%
of the value of
each side of the
transaction with a
maximum
amount of LE
(Egyptian
Pounds) 5000.

Standard fee of
0.1% of trade
value in
Moroccan
Dirhams
(MAD) levied
against buyers
and sellers
engaging in
securities
transfer or
dealing. This
fee,
Negotiation des
Titres, is
applied to both
buy and sell
legs of trade.

Discretion of
individual local
brokerage firms
(SGIs)

Two fees. First fee

on all transactions
is 0.20% for up to
50,000 TDN or
0.10% for over
50,000 TDN
traded.

Investor Protection
fee: 0.0002%
Commission

Total direct costs

of trading
(brokerage
commission and
fees): 0.0401%
Total indirect
trading costs:
0.0101%
Total trading
costs: 0.0502%

Trade fees are

contingent on
level of market
activity of
broker. Fees fall
within range of
0.0000875% to
0.001% of
trading value
and are
dependent on
level of traded
value.

Main Market: 1.4%,

trades < R1,500,000
and 0.21%, trades >
R1,500,000
Equities main
market minimum
fee: R7.42 or
R8.46(incl. VAT) on
both buy and sell
legs of a position
Clearing and
Settlement Fee:
0.0026% Subject to
minimum of R2.33
(R2.66 incl. VAT)
on buy leg and
R9.43 (R10.75 incl.
VAT) on sell side
leg

35

Clearing fee:
0.125 per
thousand of
transaction value

Second fee follows

trade value
schedule:
<500,000 TDN of
0.25%, 500,001
TDN to 1M TDN
of 0.20%, 1M
TDN to 2m tdn OF
0.15%, 2M TDN
to 3M TDN of
0.10%, and over
3M TDN of 0.05%

36