Abstract

The main purpose of this paper is to examine the main role of liquidity in stock pricing on African emerging stock markets. The study applies portfolios panel data analysis to modify and adapt the existing estimation process. Using three different procedures, six portfolios have been constructed base on the 32 most active stocks on the so called BRVM; the measures of liquidity considered are the turnover and the illiquidity ratios. To reach our objectives, we first of all verify if liquidity is taken into consideration in the explanation of expected excess return. Secondly, we verify whether liquidity risk is correctly priced on BRVM. The results indicate that from 1998 to 2008, whereas liquidity is correctly taken into account in equity pricing, there is no significant evidence that liquidity risk is priced on the BRVM. These conclusions remain stable even when various tests of robustness are undertaken and they are not consistent with results obtained by the authors on developed stock markets. These results may be explained by the microstructure of the BRVM.

Key words: Liquidity, liquidity risk, expected return, emerging stock exchange market.