Impact of liquidity on stock returns: an empirical investigation of the Tunisian stock market

Abstract

This paper investigates the return-liquidity relationship on one Middle East and North Africa frontier market, the Tunisian Stock Exchange (TSE). The findings provide evidence that there is a significant and positive premium for companies with high price impact and low trading frequency. However, Tunisian investors appreciate more low spread stocks. We show, also, a non-linear relation between potential delays of execution and stock returns. In addition, we find that Tunisian investors require a premium to compensate past cumulative illiquidity risk (high price impact, low turnover and high potential delay of execution) over the prior three to 12 months and to compensate past cumulative spread over 12 months. We point out also that these effects are seasonal.return, liquidity, Tunisian stock market,

A review of the contextual factors associated with the North African business environment - descriptive historical study

“…Despite the reforms, the rate of growth in the number of listed firms on the market has not been high (from 34 companies in 1998 to 48 companies in 2006). The Tunisian market is not strongly flexible compared to markets in developed countries (Loukil et al, 2010). It has been argued that ownership structures of some Tunisian Stock Exchange companies have not been transparent (Ben Naceur et al, 2006).…”

“…These reforms aimed to renew the stock market and to hasten development and to attract investors to the market. The Tunisian Stock Exchange was upgraded to be in accord with international standards in 1994 (Loukil et al, 2010). In this market, positive pictures of investment and minority shareholder protection are apparent.…”

“…Introduction of the electronic system for transactions and IFRS are considered to have been important steps forward for the Tunisian market (Ben Naceur et al, 2006). In the market trading volume has importantly increased after the adoption of the automatic trading system (Loukil et al, 2010;Sioud and Mezzez Hmaied, 2003). Development of security markets has been done by the deregulation of the financial sector.…”

“…This market had 38 listed companies by the end of the 1990s (Loukil et al, 2010;Sioud and YounÈs, 2010;Tunisia, 2010). During the past two decades several reforms have been enacted in the Tunisian financial markets.…”

“…From that time transferring the Tunisian market from manual trading to automated trading has happened gradually . Furthermore, this market is considered to have been the first Arab market to have accepted the SUPERCAC UNIX technology (Loukil et al, 2010;Sioud and YounÈs, 2010). Introduction of the electronic system for transactions and IFRS are considered to have been important steps forward for the Tunisian market (Ben Naceur et al, 2006).…”