Estimation of Transaction Costs on the Tunisian Stock Exchange: An Empirical Research Via a Tobit Model with Frictions

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ABSTRACT

The purpose of this paper is to estimate transaction costs on the Tunisian Stock Exchange (TSE). We will use the methodology proposed by Lesmond, Ogden and Trzcinka (1999). Our study is done on an order-driven market whether the Lesmond and al. study was done on a quote-driven market.

The data is composed of stocks listed on the TSE for the period 2000-2004. We estimate the spread using the Roll (1984), George, Kaul and Nimalendran (1991) methods and compare these estimations with the results obtained by the Lesmond and al. model. The George and al. model over-estimate the spread. Lesmond and al. model seems to be the appropriate estimation of the transaction costs on the TSE.

JEL Classification: G12; G14; G15

Keywords: Spread; Transaction costs; Order-driven market; Tobit

I. INTRODUCTION

Estimation of transaction costs is an important topic for empirical analyses of market efficiency and microstructure. Transaction cost affects considerably returns and volatility. Despite this important role, their estimates are not available, or where available, are subject to expense or error. Major studies estimate the transaction costs using the bid-ask spread.

The valuation of spread requires an intraday dataset including the volume and the better prices quoted. The size of this data will increase with the number of stocks quoted in the market. Declerck (2002) listed 5 millions transactions and the same number of bid ask spreads for the period between January and June 1998 for the CAC 40 stocks. For emerging markets (including the TSE) such databases are not available. So that two methods have been developed to evaluate the spread: methods using direct valuation from the variance of successive prices of shares [Roll (1984) and George, Kaul and Nimalendran (1991) (here after GKN)] and methods using estimation of the spread from proxies such as trading volume, firm size, number of shares outstanding, abnormal return etc. [Gredoriou, Ionnidis and Skeratt (2005) Atkins and Dyle (1997) and Boubaker and Naoui (2005)].

The limit of the second group of models is that the estimation of the spread is done by variables, which explain at most 15% to 21% of spread changes. The purpose of these models is to study the effect of adverse selection as a component of transaction costs and not a direct estimation of these costs.

The first group of models provides a more appropriate and used estimation of the transaction costs. Using these models, the transaction costs are equal to the sum of the spread and the commissions. Many authors [Grossman and Miller (1988), Lee and Ready (1991), Peterson and Fialkowski (1994) and Johnson (1994)] argue that the spread plus the commissions overstate the effective transaction costs.

Lesmond, Ogden and Trzcinka (1999) (here after LOT) propose a model in the framework of adverse selection of Glosten and Milgrom (1985) and Kyle (1985). The marginal informed investor does not transact until the anticipated benefit of the trade exceed his cost. The transaction cost represents a limit that must be exceeded before the security's return will reflect new information. A zero return is observed every time the anticipated return does not cover the transaction cost. This cost is positively correlated with the number of daily zero returns over a period. The results of LOT indicate a high correlation between the percentage of zero return and the spread on the NYSE and the AMEX over the period 1963-1990. Also, they pointed out a significant impact of the market value and the price of shares on the transaction cost.

The aim of this paper is to estimate the transaction cost in the Tunisian Stock Exchange (TSE) by using the LOT methodology and to compare these estimates to those obtained by Roll and GKN spreads. Contrarily to the American stock market, a quote-driven market, the TSE is an order-driven market. In a quote-driven market, both the commission and the spread are fixed by the market makers, whereas in an order-driven market, the commissions are fixed by the brokers and the spread results from investors limit order and transaction-flows. …