Determinants of liquidity of equity stocks listed at Nairobi stock exchange

Abstract

This paper sought to identify the determinants of liquidity of equity stocks listed at the Nairobi Stock Exchange. Various conventional liquidity indicators are constructed for the study period January 1995 to December 2002. This study found that market capitalization, pnce volatility, market concentration and number of companies listed contribute significantly to the liquidity of listed equity stocks at the Nairobi Stock Exchange. The results of our analysis suggested a strong positive correlation between these predictor variables and liquidity as measured separately by value traded ratio and turnover ratio. They explain approximately 90% of the variability in stock liquidity at the NSE. We found that turnover ratio increased between 1995 and 2002 with the highest increase between 2001 and 2002 when improved trading was reported. This is an indicator of a liquid stock market. Value traded ratio however is relatively small implying a small market and less liquidity on an economy-wide basis. Reduced economic activity in the Kenyan economy as evidenced by the very low (sometimes negative) GDP growth rate has hampered the growth of the NSE and impacting negatively on its liquidity.