A Study of Determinants of Capital Market Liquidity in Zambia

Abstract

The study aimed at establishing economic determinants of capital market liquidity in Zambia, to contribute to efforts towards increasing liquidity in the market. Capital markets are financial avenues through which long-term investment is secured for purposes of enhancing economic activity either in debt and or equity markets (SEC bulletin, 2017: 21). In this regard, capital (LuSE) market turnover is the liquidity of the market measured by the value of trade volume of equity against total equity issued (Ibid). It therefore follows that the study examined the relationship between capital market liquidity (LuSE turnover as a proxy) as the response variable and GDP growth rate, inflation, money supply (broad money) growth rate, average annual crude oil price per barrel and exchange rate against the US dollar as regressors. The research data sample was for 21 years from 2000 to 2021 for both the response and regressor variables. The research utilised the autoregressive distribution lag model (ARDL) to establish the state of the relationships between capital market liquidity and regressor variables because the data was differenced at order 0 and 1. Before running the ARDL model, the data was subjected to statistical tests of normal distribution, stationarity, multicollinearity, and heteroscedasticity. The bounds test was performed on the data to determine if the relationship between the regressors and the response variable were either short or long run. The outcomes of the statistical tests show that only a short-run relationship exists among the variables. The short run relationship ARDL statistical results interestingly show that only crude oil price per barrel and the exchange rate are statistically significant at 95% confidence interval to influence capital market liquidity outcomes. The results show that crude oil price per barrel is positively related to capital market liquidity by a coefficient of 34100000 whereas the exchange rate is negatively related to capital market liquidity by a coefficient of 1350000000. In this regard, a unit increase in crude oil price per barrel increases capital market liquidity by K34,100,000 whereas a unit depreciation of the Kwacha against the US dollar reduces capital market liquidity by K1,350,000,000. To increase liquidity or turnover in the Zambian capital market for purposes of increasing economic activity for job creation and population welfare improvement, the study recommends adoption of macroeconomic policies that would strengthen the Kwacha against the US dollar in the short run to prevent or reduce liquidity or turnover losses. It further recommends that the country establish and utilise regression models based on significant macroeconomic variables for forecasting capital market liquidity as a better means of forecasting and managing risks that may affect capital market turnover, and thereby securing investment and job creation to attain economic growth.