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A reassessment of stock market integration in SADC: the determinants of liquidity and price discovery in Namibia

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  • Bruce Hearn
  • Jenifer Piesse

Abstract

The New Economic Partnership for Africa's Development (NEPAD) focuses on the benefits of integrating many smaller African markets with South Africa as the central hub, motivated by a wish to attract foreign investment and increase the liquidity. However, little attention has been paid to issues regarding the migration of liquidity and the loss of the price discovery mechanism in an integrated union where one market dominates. This article 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 institutional quality measures of the control of corruption, while the price-discovery process (and hence trader participation in markets) is highly sensitive to the control of corruption, political stability and regulatory quality.

Suggested Citation

  • Bruce Hearn & Jenifer Piesse, 2013. "A reassessment of stock market integration in SADC: the determinants of liquidity and price discovery in Namibia," Applied Financial Economics, Taylor & Francis Journals, vol. 23(2), pages 123-138, January.
  • Handle: RePEc:taf:apfiec:v:23:y:2013:i:2:p:123-138
    DOI: 10.1080/09603107.2012.711938
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    File URL: http://hdl.handle.net/10.1080/09603107.2012.711938
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    References listed on IDEAS

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    1. YiLi Chien & Hanno Lustig, 2010. "The Market Price of Aggregate Risk and the Wealth Distribution," Review of Financial Studies, Society for Financial Studies, vol. 23(4), pages 1596-1650, April.
    2. Jacqueline T Irving, 2005. "Regional Integration of Stock Exchanges in Eastern and Southern Africa; Progress and Prospects," IMF Working Papers 05/122, International Monetary Fund.
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    Cited by:

    1. Boamah, Nicholas Addai & Loudon, Geoffrey & Watts, Edward J., 2017. "Structural breaks in the relative importance of country and industry factors in African stock returns," The Quarterly Review of Economics and Finance, Elsevier, vol. 63(C), pages 79-88.
    2. repec:eee:quaeco:v:65:y:2017:i:c:p:88-96 is not listed on IDEAS
    3. repec:eee:jebusi:v:92:y:2017:i:c:p:29-44 is not listed on IDEAS
    4. Bruce Hearn & Jenifer Piesse, 2015. "The Impact of Firm Size and Liquidity on the Cost of External Finance in Africa," South African Journal of Economics, Economic Society of South Africa, vol. 83(1), pages 1-22, March.

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