Abstract
This study estimates liquidity premiums using the recently developed Liu (2006) measure within a multifactor capital asset pricing model (CAPM) including size premiums and a time-varying parameter model for the North African emerging markets of Algeria, Egypt, Morocco and Tunisia. The evidence suggests that size and liquidity effects are least significant in Morocco which is reflected in its low cost of equity while that in Egypt and Tunisia is significantly higher. Time-varying profiles of liquidity betas provide evidence that Morocco and Egypt have been affected by the 2007/2008 global financial crisis while the Tunisian market is relatively unaffected.
Highlights
The application of standard asset pricing theory dictates that expected stock returns are related cross-sectionally to returns sensitivities to state variables that are themselves linked to investors overall welfare (Pastor and Stambaugh, 2003)
The valuation models are applied across individual country universes as well as a regional universe for the equity markets of the North African Maghreb region, namely Algeria, Egypt, Morocco and Tunisia
An additional benefit from the application of time varying techniques is that a study of the effects of the 2007/2008 global financial crisis on domestic North African industries can be undertaken
Summary
The application of standard asset pricing theory dictates that expected stock returns are related cross-sectionally to returns sensitivities to state variables that are themselves linked to investors overall welfare (Pastor and Stambaugh, 2003). Data: Summary statistics relating to liquidity measures The considerable differences in liquidity, size and activity between sectors, listing compartments and national markets can be clearly seen from Table 5 This contrasts the mean cross section values for daily percentage zero returns, stock prices, traded volumes, market capitalization and bid-ask spreads for the component firms within the Maghreb markets. These are further sub-divided into the three major listings compartments for Morocco, main, development and growth, the two major index groups for Egypt, CASE70 and Overall, and into major industry categories where industries accounting for only a fraction of capitalization and traded value, namely under 5% of the total, are omitted. It is indicative of the significant segmentation apparent both between and within North African markets and provides further justification for this study in it’s contrasting individual market universes for each of the countries in turn, bar Algeria where there are too few stocks to achieve diversification, against an aggregate North African universe
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