Does the revitalisation process really enhance stock market microstructure? Evidence from the Nairobi Stock Exchange

Abstract

This paper investigates the response of the market microstructure to revitalization of the Nairobi Stock Exchange, which comprised the establishment of a market regulator, shift to a new trading system and free entry of foreign investors. Econometric modeling of efficiency, volatility and liquidity, using the market index and firm level data 'before' and 'after' the introduction of the reforms, yields three main findings. First, the price discovery process shows efficiency gains, following the establishment of the market regulator and free entry of foreign investors, but not after the shift to an open out-cry trading system. Second, the revitalization period is characterized by a negative relationship between efficiency gains and volatility. Third, in general, the free entry of foreign investors has positive impact on market microstructure, including a temporary rise in liquidity, low volatility and efficiency gains.