Abstract
In this paper, we explore the dynamic relationship between aggregate foreign equity inflows and aggregate liquidity of the Kenyan stock market using transactional foreign trading data and several l...
Highlights
Market liquidity1 is a fundamental ingredient of a well-functioning capital market (Verrier, 2010)
Conclusion and policy recommendations This study examined the interaction between foreign equity portfolio flows and local stock market liquidity in Kenya over the period January 2011–December 2018
The analysis was based on vector autoregression (VAR) model with monthly foreign equity flows, returns, and liquidity measures as FLOWS 1.72 4.76 9.47 24.62 0.67 2.76 13.56 31.02 1.95 2.41 4.56 10.94 0.43 1.26 11.52 31.12
Summary
Market liquidity is a fundamental ingredient of a well-functioning capital market (Verrier, 2010). We find that changes in foreign equity inflows explain up to 30% varia tions in local stock liquidity This finding renders support to a recent policy by the Capital Markets Authority of Kenya that lifted a ceiling of foreign shareholding from 75% to 100%. Since the era of capital liberal ization, the question of whether foreign equity flows to developing markets promotes or impedes local stock market liquidity has generated a longstanding debate. We provide some stylized facts on trading activity, institutional features, reforms (geared towards promoting liquidity), and foreign investor activity at the Kenyan stock market, the Nairobi Securities Exchange (NSE), over the period 2011 to 2018. Policymakers have provided tax incentives as well as attempting to broaden the range of products such as introduction of short-selling and working on introducing a derivative market
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