Is Liquidity a Pricing Factor on the JSE?

Abstract

This paper builds on the findings of previous studies that found size, value and momentum effects to be significant in explaining excess stock returns on the JSE by adding a further potential explanatory factor, namely liquidity. Five liquidity proxies are used: the bid-ask spread, turnover, the price impact measure and two zero return measures. Our findings suggest that while size, value and momentum are significant in explaining excess stock returns on the JSE, liquidity is not found to be significant, irrespective of the type of liquidity measure used.

Notes

1 The authors would like to thank Professor Dave Bradfield from BNP Paribas Cadiz for his assistance in obtaining some of the data.

2 The choice of proxy for the specific pricing factor is based on an extensive analysis process conducted as part of this research which is not reported here but available from the authors on request.

3 The decision to rebalance the portfolios annually is based on an attempt to imitate the assumed actual experience of an average investor. More frequent rebalancing will incur high trading costs, which most average investors are unwilling to accept. Refer to Basiewicz and Auret (2009) for further details about this assumption.

4 These are available from the authors on request.