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

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.

Keywords:

• integrated financial markets
• institutions
• Africa

JEL Classification::

• G14
• G15
• N27

Acknowledgements

The authors thank Keith Jefferis and Ron Smith for valuable help and comments and John Mandy and Manda Steynberg for data on the NSX operations.

Notes

¹ In line with Liu (2006), a deflator of 11 000 is used in constructing estimates for LM1.

² The BRVM as a regional stock exchange comprised of a central trading floor in Abidjan, Cote d’Ivoire and a network of licensed brokers, or Societe de Gestion et d'Intermédiation (SGI), spread throughout the Francophone West African Economic and Monetary Union, namely UMEAO, countries including Cote d’Ivoire, Benin, Togo, Burkina Faso, Mali, Niger, Senegal and Guinea-Bissau.

³ Spearman's rank correlation tables are available from the authors upon request and are omitted in order to maintain brevity.