Stock Market Liquidity : Comparative Analysis of the Abu Dhabi Stock Exchange and Dubai Financial Market

In the context of stock markets, the financial economics literature has developed the concept of “operational efficiency” which is known to be essential in performing their economic role. Operationally efficient (liquid) markets allow investors to get their orders executed quickly and as cheaply as possible.It is common knowledge that the recent financial crisis has led to a “collapse” in world stock markets. For example, the market capitalization of the Abu Dhabi Stock Exchange (ADSE) and the Dubai Financial Market (DFM) have fallen from $121,128 million and $138,179 million in 2007 to $80,201 million and $58,095 million by the end of 2009. As expected, this collapse in both markets has some serious implications to the liquidity cost of the ADSE and DFM.This research provides answers to two main questions. First, what is the liquidity cost that prevails in the Abu Dhabi and Dubai capital markets? Second, has the March 2000 change (reduction) in the minimum tick size in the DFM led to an improvement in its' operational efficiency?Based on a total number of 22 listed firms on the DSM and 22 listed firms on the ADSE and daily data during the period 1/10/2009-1/8/2010, the empirical results indicate that liquidity cost on both the DFM and ADSE is relatively high. In addition, the results clearly indicate that the reduction in the minimum tick size of listed firms on the Dubai capital market has led to its' desired objective (reducing liquidity cost)