A Reassessment of Stock Market Integration in SADC: The Determinants of Liquidity and Price Discovery in Namibia
17 Pages Posted: 19 Nov 2012
Date Written: November 19, 2012
Abstract
The New Economic Partnership for Africa’s Development focuses on the benefits to integration of many smaller African markets with South Africa as the central hub motivated by a wish to attract foreign investment and increase liquidity. However, little attention has been paid to issues regarding migration of liquidity and loss of the price discovery mechanism in a integrated union where one market dominates. This paper reviews this policy using the example of Namibia, which is the first market to be fully integrated with South Africa. Several established liquidity constructs are compared to determine their ability to explain the bid-ask spread plus a newly introduced measure of the proportion of daily zero returns which captures the dynamics of the price discovery process and traders’ ability to trade on informational grounds that is found to be more appropriate in highly illiquid frontier markets such as Namibia. Finally there is evidence that liquidity (and illiquidity) is closely linked to the rule of law and control of corruption institutional quality measures, while the price-discovery process and hence trader participation in markets is highly sensitive to the control of corruption, political stability and regulatory quality.
Keywords: Integrated financial markets, institutions, Africa
JEL Classification: G14, G15, N27
Suggested Citation: Suggested Citation
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