Legal Regime, Size, and Liquidity Factors in Asset Pricing

Cass Business School Emerging Markets Group Working Paper WP-EMG-13-2009

41 Pages Posted: 27 Mar 2009 Last revised: 1 Jun 2011

See all articles by Bruce Allen Hearn

Bruce Allen Hearn

University of Southampton

Jenifer Piesse

University of Stellbosch; King's College London - Department of Management

Kate Phylaktis

City University London - Sir John Cass Business School

Date Written: March 27, 2009

Abstract

This study contrasts the ability of three liquidity constructs, the price-impact measure of Amihud (2002), the volume based turnover ratio, and the recently developed trading speed measure of Liu (2006) in explaining total trading costs for four large African emerging markets, Egypt, Morocco, Kenya and South Africa, as well as London and Paris. A new legal regime factor is also developed to capture the often substantial differences in returns between markets with either civil or common law origin. The evidence suggests that the Amihud construct outperforms other liquidity measures in Africa while the Amihud and Liu measures are better in London and Paris. Furthermore the incorporation of size, liquidity and legal regime valuation factors within a multifactor CAPM pricing model reveals that size and liquidity factors are significant in capturing the cross-section of returns across the sample universe. The legal regime factor offers improves performance with larger stocks. However, it is significant in capturing the cross section of returns in country portfolios. Costs of equity are found to be lowest for London, Paris and Morocco and highest for Egypt, Kenya and South Africa.

Keywords: Portfolio Choice, Asset pricing, International Financial Markets, Sub-Saharan Africa

JEL Classification: G11, G12, G15, O55

Suggested Citation

Hearn, Bruce Allen and Piesse, Jenifer and Phylaktis, Kate, Legal Regime, Size, and Liquidity Factors in Asset Pricing (March 27, 2009). Cass Business School Emerging Markets Group Working Paper WP-EMG-13-2009. Available at SSRN: https://ssrn.com/abstract=1369303 or http://dx.doi.org/10.2139/ssrn.1369303

Bruce Allen Hearn

University of Southampton ( email )

University Rd.
Southampton SO17 1BJ, Hampshire SO17 1LP
United Kingdom

Jenifer Piesse (Contact Author)

University of Stellbosch

Stellenbosch, Western Cape
South Africa

King's College London - Department of Management ( email )

Virginia Woolf Building
22 Kingsway
London, England WC2B 6NR
United Kingdom

Kate Phylaktis

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 20 70408735 (Phone)
+44 20 70408881 (Fax)

HOME PAGE: http://www.cass.city.ac.uk/faculty/k.phylaktis/

Register to save articles to
your library

Register

Paper statistics

Downloads
85
Abstract Views
560
rank
296,262
PlumX Metrics