The impact of liquidity on the cross section of equity returns on the Johannesburg Securities Exchange

Abstract

A great number of international studies suggest that certain firm-specific factors contribute significantly to explaining the cross section of equity returns. Specifically, factors capturing value, momentum and size effects are observed to be the most substantial in this regard. The majority of South African studies suggest that similar effects are present on the Johannesburg Securities Exchange (JSE). The South African equity market is regarded as a highly concentrated, less liquid market relative to those of developed markets. Therefore liquidity could have a significant impact on the results of studies concerning the cross section of equity returns on the JSE. In this study the impact of liquidity on the identity and explanatory power of firm-specific factors regarding the cross-section of returns are examined. Our results suggest that there is a strong, robust value effect on the JSE, while the significance associated with the size and momentum effects reported in prior studies are in fact sensitive to the level of sample liquidity.