The effects of liquidity level on stock returns: the Nairobi stock exchange evidence.
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Date
2008Author
Odongo, Philemon W.
Type
ThesisLanguage
enMetadata
Show full item recordAbstract
Given the evidence in other developed markets that the level of liquidity affects asset
returns, a reasonable hypothesis is that the second moment of; liquidity should be
positively related to asset returns, provided agents care about the risk associated with
fluctuations in liquidity. Motivated by this observation, this study analyzes the relation
between liquidity and stock returns with specific reference to the Nairobi Stock Exchange
(NSE). The period under study was taken from the year 2000 to 2002.
The study set to accept or reject the hypothesis that there is a relationship between
liquidity and stock returns, with liquidity proxied by Trading Volume Activity ratio, since
information flow into the market is widely unobservable. Stocks quoted at the market are
ranked on the basis of their trading activity ratios and two portfolios of bottom six and
top six stocks studied for any correlation with their returns.
The study finds that there is no relationship between liquidity and stock returns at a
confidence level of 90% and therefore that there is no liquidity premium at the Nairobi
Stock Market. This result is in line with Fama's Random Walk Theory which implies that
a series of stock price changes at the NSE has no memory. There is therefore a lot of
noise at the market.
If the lack of relationship between liquidity ~mdreturn is a pointer to inefficient pricing of
assets at the NSE then the logical policy implication is ~ identify means of making this
market efficient.
Sponsorhip
The University of NairobiPublisher
School of Business ( SOB )