| Liquidity is seen as one of the important subject matters which is widely recognize in the pricing of securities in stock markets. In the global financial circles, there is a relation between risk and returns when considering pricing of assets. In recent years however, many of the African countries have seen the establishment of financial stock markets as one of the surest way of galvanizing the needed resources to embark on the journey of economic emancipation.In order to understand the dynamics of the capital markets in sub-Sahara Africa (SSA), the reseach decided to use Ghana as a case study. Using Ghana as a case study is a strategic one since Ghana's stock market which was established in 1989 and started operation in 1990 was adjudged as the world's best performing market at the end of 2004 with a year return of 144% in US dollar terms compared with a 30% return by Morgan Stanley Capital International Global Index (Databank Group, 2004). The author used mainly secondary data sourced from the GSE and interviewed the Securities and Exchange Commission (SEC) secretariat. The data for this research is for a period of ten years (10) of trading obtained from the GSE. The rearach employed the Amihud (2002) illiquidity ratio as the basis for measuring illiquidity of assets in the Ghanaian market. Several models have being used in finding and predicting the markets in the advanced capital markets However, the same cannot be said in sub-Sahara Africa. This makes the use of the Liquidity-adjusted capital asset pricing model (LCAPM) as my model a novel model for predicting liquidity. One outstanding innovation in using the LCAPM is that it will help in investigating the extent to which the price impact factor influences investment behaviour in Ghana. It will also unearth how risk factors in the form of financial crunch fair in an emerging SSA market frontier with particular reference to the Ghana Stocks Exchange (GSE).The aim and significance of this dissertation is to explore deeper into stock liquidity and its relation with returns as a crucial component of asset pricing in Sub-Sahara Africa (SSA) using Ghana as a case study.It is important however, to indicate that many of the existing literature focus more on the capital markets in the US, Europe and Asian to the detriment of some less attractive emerging markets such as the one in sub-Sahara Africa. This is not surprising since these markets were established not long ago. The market in sub-Sahara Africa is also dominated by volatility with unpredictable degree of liquidity cost, unregulated smaller markets as well as the lack of proper governance system. As a result, most investors are not prepared to venture into such markets due to the uncertainty surrounding investment in the region.The first essay looks at the estimation of a conditional version of liquidity-adjusted capital asset pricing model in an emerging market in line with the corporate social responsibility (CSR) of the Ghana Stocks Exchange. The concluded evaluation on this essay points to the fact that illiquidity risk can be measured in the local market and exhibit a strong trend of mix reactions from liquidity premia. While the effect of the recent financial crisis does not show much difference between the different market conditions, the effect is stronger in the down market than the up market. Exploring the size effect on the market concludes that the net beta as well as the systematic liquidity risk is pronounced in the smaller market though insignificant.In the second essay, a comparative analyses using covariance as a measure of the reaction of the market in the face of volatility is used. It was realized that systematic liquidity risk is priced in Ghana using the different risk premia. Our evaluation concludes that under different market situation, the Ghanaian economy is more align to the downward market where stocks were priced during the period of the last financial shock.The third essay considers the slowdown of the Ghanaian economy after it highest growth in 2011; a five year period spanning from 2011 to 2015 was selected to check the effect of the slowdown on the economy and the response of investors. Using the conditional version of LCAPM, we find that co-movements between stock returns and individual liquidity, market liquidity as well as market returns react differently under different market conditions. Applying the size effect on liquidity, it is evidence that the size effect is stronger for smaller firms in Ghana than for larger firms. While the effect of the recent financial crisis do not exhibit a strong influence on the market, it effect is stronger in the down market than the up market.Last but not the least, the fourth and last essay examine the effect of illiquidity risk on expected excess stock returns in sub-Saharan Africa. Evidence exists to show that an expected stock return is positively correlated with market illiquidity in Sub-Sahara Africa. Evidence shows that global risk aversion has direct influence on the stocks markets of these sub-Saharan countries.Furthermore, US market serve as an important driving force in sub-Sahara Africa market as South Africa which play a bigger role in the region as far as market capitalization is concern has majority of its shares own by investors outside the region.In summary, this dissertation estimate the potential of firms' returns in the face of systematic liquidity risk in Ghana using asset pricing model that best fit the market. In general, the results from the study indicate that premium paid as compensation for investors is stronger mostly for systematic liquidity risk than for stocks characteristics generally. It came out from the analysis that co-movements between stock returns and liquidity react differently under different market conditions. Also, the effect of firms' size on liquidity is stronger for smaller firms than for larger firms in Ghana. Moreover, the recent financial crisis that occurred in 2008 was felt more in downturn market than the up market. There is also an indication that the market in Ghana is highly illiquid, lacking transparency and protection for firms.The research components of this dissertation comprise seven chapters, each dealing with one aspect of the research work. Chapter one is entirely devoted to the background, stating the main problem of the study, bringing out the objectives that necessitated the research as well as the research questions that are appropriate to carry out the research. In chapter two, I concentrated on the relevant literature on asset pricing, liquidity and aggregated liquidity risk. Chapter three considers a relationship between corporate social responsibility and liquidity. Chapter four is devoted to the use of covariance in understanding the basic theoretical and analytical LCAPM model. Chapter five examines the consistency of the conditional asset pricing model during the five year economic slowdown in Ghana. Chapter six discusses the effect of illiquidity risk on expected excess stock returns in sub-Saharan Africa. In the final analysis, chapter seven concludes by summarizing the entire study, criticisms and make recommendations for future studies. |
PDF Full Text Request