The Existence of Common Liquidity Factors in African Financial Markets: An Investigation on the JSE and the NSE (International Journal of Accounting, Finance, Auditing, Management and Economics)

Summary

• The study tests for common liquidity factors on the JSE and the NSE using 224 listed shares, of which 121 are on the JSE and 103 on the NSE, between 2000 and 2020.p.2
• Trading volume is used as the liquidity indicator, and the estimation relies on Ordinary Least Squares and Generalized Least Squares.p.2
• The results conclude that common liquidity factors exist both within each market and across the two markets.p.2
• Investors are advised to include systematic liquidity risk in their portfolio management and investment strategy.p.2
• The existence of such a factor shows that liquidity shocks propagate from one market to another.p.17

Key insights

1. The study covers 224 shares observed on the two leading African stock exchanges.p.12
2. Trading volume is used alongside the bid-ask spread because most African exchanges use an order system rather than price quotation.p.12
3. The absence of liquidity during the Asian crisis of 1997-1998 motivated researchers to explore its systematic component.p.6
4. Brockman et al. studied 47 emerging and developed markets and found a common liquidity factor across them.p.11
5. Tissaoui et al. confirmed the existence of common liquidity factors using 38 stocks on the Tunisian market.p.8
6. Stahel (2005a) documented a global liquidity effect using only the Japanese, UK and US markets over 1980 to 2001.p.9
7. The direction of the influence of market liquidity on individual shares is positive or negative depending on the stock.p.17