Paper
Journal of Derivatives & Hedge Funds (2008) 14, 222–236. doi:10.1057/jdhf.2008.21
The effect of electronic trading on market volatility and liquidity in emerging markets: Evidence from Amman Stock Exchange
Practical applications The study of the impact of electronic trading on volatility and liquidity is important for different parties and for different reasons. It is of concern to policy makers, domestic, as well as, foreign investors, corporations and other financial market participants. When a market is conceived as highly volatile, that volatility may act as a barrier to investing in that market. Poor liquidity and high volatility are considered to be the main reasons that prevent foreign institutional investors from investing in emerging markets. This reduces the capital flow to the market and affects the cost of capital for corporations. Poor liquidity and high volatility represent a serious concern for policy makers because they lead to financial instability. This creates uncertainty and negatively affects the growth potentials. In addition, stock prices and return volatility constrains economic growth and performance through their negative effect on consumer spending.
Ritab Al-Khouri1 and Nisreen Al-Ghazawi2
Correspondence: Ritab Al-Khouri, Department of Economics and Finance, College of Business and Economics, Qatar University, Doha, Qatar. Tel: +974 5400929; Fax: +974 4851564; E-mail: r.al-khouri@qu.edu.qa
1Ritab Al-Khouri is a full professor of finance at the Yarmouk University in Jordan. She is currently on leave, teaching at Qatar University. She graduated from the University of Wisconsin at Madison in the USA, and has published many articles in different national and international journals. Her research interests include portfolio management, corporate finance, corporate governance, and international finance.
2Nisreen Al-Ghazawi is a junior lecturer at the Yarmouk University. She finished her MBA degree in 2005. Her research interests are capital markets and portfolio management.
Received 21 June 2008; Revised 21 June 2008.
Abstract
This study investigates the impact of the electronic trading system (ETS) on market volatility and liquidity on the Amman Stock Exchange (ASE) before and after its implementation on 26th March, 2000. Using a sample of 34 companies, we collected data on closing prices, volume, and number of shares traded over the period from 2nd January, 1996 to 2nd January, 2004. The Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model was used to test the volatility level, while liquidity was examined by measuring the difference between the relative means of 'trading volume' in the two periods. Empirical results using the GARCH model with dummy variable show a reduction in volatility after the adoption of electronic trading. The persistence of the shocks to volatility, however, seemed to last for sometime in the future when the exchange moved to an ETS. Similar results were detected for each company separately. In addition, the adoption of electronic trading has improved the liquidity level of ASE.
Keywords:
volatility, liquidity, Amman Stock Exchange, GARCH
