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Open Access
Article
Publication date: 11 January 2021

Szymon Stereńczak

This paper aims to empirically indicate the factors influencing stock liquidity premium (i.e. the relationship between liquidity and stock returns) in one of the leading European…

1207

Abstract

Purpose

This paper aims to empirically indicate the factors influencing stock liquidity premium (i.e. the relationship between liquidity and stock returns) in one of the leading European emerging markets, namely, the Polish one.

Design/methodology/approach

Various firms’ characteristics and market states are analysed as potentially affecting liquidity premiums in the Polish stock market. Stock returns are regressed on liquidity measures and panel models are used. Liquidity premium has been estimated in various subsamples.

Findings

The findings vividly contradict the common sense that liquidity premium raises during the periods of stress. Liquidity premium does not increase during bear markets, as investors lengthen the investment horizon when market liquidity decreases. Liquidity premium varies with the firm’s size, book-to-market value and stock risk, but these patterns seem to vanish during a bear market.

Originality/value

This is one of the first empirical papers considering conditional stock liquidity premium in an emerging market. Using a unique methodological design it is presented that liquidity premium in emerging markets behaves differently than in developed markets.

Details

Studies in Economics and Finance, vol. 38 no. 1
Type: Research Article
ISSN: 1086-7376

Keywords

Article
Publication date: 29 July 2014

Alex Moss and Nicole Lux

The purpose of this paper is to test the hypothesis that the valuations of European real estate securities are, in part, determined by the relative liquidity in the companies’…

Abstract

Purpose

The purpose of this paper is to test the hypothesis that the valuations of European real estate securities are, in part, determined by the relative liquidity in the companies’ shares.

Design/methodology/approach

Six groups are derived for our sample of European listed real estate companies. They are split between the UK and Europe, and then both sets are categorised by liquidity as large, medium or small. These are then tested for market depth, market tightness and difference in valuations over the cycle 2002-2012. Intuitively, it can be expected that the stock market valuation premium for companies with greater liquidity increases post the global financial crisis.

Findings

The key discriminating variable that drives companies’ liquidity and valuations is market capitalisation. For both the UK and Europe, the valuation premium of larger companies vs small companies has increased significantly since 2008 (by 20-40 per cent), which can be attributed to the increased value placed on liquidity post GFC.

Research limitations/implications

The sample size is relatively small, and subject to individual company influences on stock market valuation.

Practical implications

The key implications from the findings are the cost and quantum of new equity capital available to companies with superior liquidity, and the possibility of exclusion from portfolios for companies with low liquidity.

Originality/value

Previous studies have focussed on returns for measuring a liquidity premium. This study focusses on relative valuations and how the liquidity premium changes throughout the cycle.

Details

Journal of European Real Estate Research, vol. 7 no. 2
Type: Research Article
ISSN: 1753-9269

Keywords

Article
Publication date: 26 September 2019

Isil Erol and Tanja Tyvimaa

The purpose of this paper is to explore the levels and determinants of net asset value (NAV) premiums/discounts for publicly traded Australian Real Estate Investment Trust…

Abstract

Purpose

The purpose of this paper is to explore the levels and determinants of net asset value (NAV) premiums/discounts for publicly traded Australian Real Estate Investment Trust (A-REIT) market during the last decade. A-REITs were severely affected by the global financial crisis as S&P/ASX 200 A-REIT index-listed property stocks experienced 47 per cent discount to NAV, on average, in 2008–2009 crisis. Since 2013, A-REIT sector has exhibited a strong recovery from the financial crisis and traded at high premiums to date. Understanding the relationship between pricing in the public and private real estate markets has taken on great importance as A-REITs continue to trade at significant premium to NAV unlike their counterparts in the USA and Europe.

Design/methodology/approach

This paper follows a rational approach to explain variations in NAV premiums and explores the company-specific factors such as liquidity, financial leverage, size, stock price volatility and portfolio diversification behind the A-REIT NAV premiums/discounts. The study specifies and estimates a model of cross-sectional and time variation in premiums/discounts to NAV using semi-annual data for a sample of 40 A-REITs over the 2008–2018 period.

Findings

The results reveal that A-REIT premiums to NAV can be explained not only by the liquidity benefit of listed property stocks but also positive financial leverage effect. During the past decade, A-REITs have followed an aggressive approach in financing their growth by using borrowed funds to purchase assets as the income from the property offsets the cost of borrowing and the risk that accompanies it. Debt-to-equity ratio has to be considered as an important source of NAV premiums as highly geared A-REITs that favoured debt financing over equity financing traded at significant premiums to NAV of their underlying real estate assets.

Practical implications

The paper includes implications for the REIT market investors. The regression analysis shows that specialty A-REITs with a focus on creative market niches traded at higher premiums compared with other property stocks, especially in the post-GFC recovery period. Specialty REITs are more highly valued by the market than their traditional specialised counterparts (e.g. office and retail REITs), and those pursuing a diversified strategy.

Originality/value

This paper presents an Australian case study as the A-REIT market provides a suitable environment for testing the effect of financial gearing on the REIT premium to NAV. The study provides empirical evidence supporting the importance of debt-to-equity ratio in explaining the variation in A-REIT NAV premiums.

Details

Journal of Property Investment & Finance, vol. 38 no. 1
Type: Research Article
ISSN: 1463-578X

Keywords

Open Access
Article
Publication date: 28 October 2022

Szymon Stereńczak

The positive illiquidity–return relationship (so-called liquidity premium) is a well-established pattern in international developed stock markets. The magnitude of liquidity

Abstract

Purpose

The positive illiquidity–return relationship (so-called liquidity premium) is a well-established pattern in international developed stock markets. The magnitude of liquidity premium should increase with market illiquidity. Existing studies, however, do not confirm this conjecture with regard to frontier markets. This may result from applying different approaches to the investors' holding period. The paper aims to identify the role of the holding period in shaping the illiquidity–return relationship in emerging and frontier stock markets, which are arguably considered illiquid.

Design/methodology/approach

The authors utilise the data on stocks listed on fourteen exchanges in Central and Eastern Europe. The authors regress stock returns on liquidity measures variously transformed to reflect the clientele effect in a liquidity–return relationship.

Findings

The authors show that the investors' holding period moderates the illiquidity–return relationship in CEE markets and also show that the liquidity premium in these markets is statistically and economically relevant.

Practical implications

The findings may be of great interest to investors, companies and regulators. Investors and companies should take liquidity into account when making decisions; regulators should employ liquidity-enhancing actions to decrease companies' cost of capital and expand firms' investment opportunities, which will improve growth perspectives for the entire economy.

Originality/value

These findings enrich the understanding of the role that the investors' holding period plays in the illiquidity–return relationship in CEE markets. To the best knowledge, this is the first study which investigates the effect of holding period on liquidity premium in emerging and frontier markets.

Details

International Journal of Emerging Markets, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1746-8809

Keywords

Book part
Publication date: 19 December 2012

Iuliana Matei and Angela Cheptea

Recently the world economy was confronted to the worst financial crisis since the great depression. This unprecedented crisis started in mid-2007 had a huge impact on the European…

Abstract

Recently the world economy was confronted to the worst financial crisis since the great depression. This unprecedented crisis started in mid-2007 had a huge impact on the European government bond market. But what are the main drivers of this “perfect storm” that since 2009 affects EU government bond market as well? To answer this question, we propose an empirical study of the determinants of the sovereign bond spreads of EU countries with respect to Germany during the period 2003–2010. Technically, we address two main questions. First, we ask what share of the change in sovereign bond spreads is explained by changes in the fundamentals, liquidity, and market risks. Second, we distinguish between EU member states within and outside the Euro area and question whether long-term determinants of spreads affect EU members uniformly. To these ends, we employ panel data techniques in a regression model where spreads to Germany (with virtually no default risk) are explained by set of traditional variables and a number of policy variables. Results reveal that large fiscal deficits and public debt as well as political risks and to a lesser extent the liquidity are likely to put substantial upward pressures on sovereign bond yields in many advanced European economies.

Details

Essays in Honor of Jerry Hausman
Type: Book
ISBN: 978-1-78190-308-7

Keywords

Article
Publication date: 19 June 2023

Rintu Anthony and Krishna Prasanna

The study attempts to identify the linkages in the term structure of illiquidity and the impact of global and domestic factors on sovereign bonds in emerging Asia. The objective of

Abstract

Purpose

The study attempts to identify the linkages in the term structure of illiquidity and the impact of global and domestic factors on sovereign bonds in emerging Asia. The objective of the study ensues on defining the direction of illiquidity spillover across bonds of varying tenors.

Design/methodology/approach

This study explores the joint dynamics of contemporary liquidity risk premia and its time-varying effect on the term structure spectrum using the Diebold and Yilmaz (2012) spillover framework.

Findings

A substantial relationship was found to exist between the liquidity of bonds with closer terms to maturity. The macroeconomic environment primarily impacts the liquidity of 10-year bonds, and they spiral down to the subsequent bond liquidity, exhibiting a rippling effect. The authors further show that the direction of liquidity shock transmission is from long- to medium- and thence to short-term bonds. Among the global factors, foreign investments and S & P 500 VIX significantly affect the liquidity of 10-year bonds.

Research limitations/implications

The study has several implications for academicians, policymakers and domestic and global investment professionals. The drivers of liquidity risk and the transmission across the term structure help investors in designing efficient portfolio diversification strategies. The results are relevant for cross-border investors in the valuation of emerging Asian sovereign bonds while deciding on asset allocations and hedging strategies. The monetary regulators strive on a continuous basis to improve the liquidity in sovereign bond markets in order to ensure efficient funding of development activities. This study finds that short-term bonds are more liquid than long-term bonds. Their auction framework with higher series of short-term bond issues helps to provide the required liquidity in the markets.

Practical implications

The term structure of illiquidity is upward sloping, inferring a higher underlying liquidity risk of long-term bonds compared to short-term bonds. This finding suggests that a higher representation of short-term bonds in the auction framework helps to enhance the overall market liquidity.

Originality/value

This study offers insights into the debate on the shape of the term structure of illiquidity and the point of origination of liquidity shocks. Further, the direction of spillover across a wide spectrum of bonds is also demonstrated.

Article
Publication date: 4 July 2016

Nicole Lux and Alex Moss

The purpose of this paper is to test the relationship between liquidity in listed real estate markets, company size and geography during different market cycles, specifically…

Abstract

Purpose

The purpose of this paper is to test the relationship between liquidity in listed real estate markets, company size and geography during different market cycles, specifically pre-crisis (2002-2006) and post-crisis (2010-2014). Further, the study analyses the impact of stock liquidity on stock performance. In a previous study the authors examined the impact of liquidity on the valuation of European real estate shares. The result showed that there is a strong relationship between liquidity, valuation and market capitalisation post the Global Financial Crisis.

Design/methodology/approach

The paper studies the linkages between regional market liquidity and company size for 60 listed real estate companies globally and determines the key drivers of company stock market liquidity pre- and post-crisis as well as the impact on stock performance. Analysis of variance is used to test cross-sectional independence in market liquidity combined with the Tukey’s post hoc test. The selected test indicators of liquidity to capture market depth and market tightness are daily stock turnover as percentage of market capitalisation and daily bid-ask spreads.

Findings

Findings confirm previous studies that market liquidity factors are correlated globally over time indicating markets interdependence. However, sample groups by company size and geography form independent samples with different sample means, thus specific liquidity levels in each market may be different. First, stock turnover levels have not recovered post-crisis to pre-crisis levels in the majority of markets while spreads have continued moving downward to nearly insignificant levels in line with the rest of the equity market. Second, with regards to stock performance, the European bias previously detected is not apparent in the USA, and there is no evidence of the small cap vs large cap effect of small companies achieving superior returns, although smaller companies have outperformed in Europe and Asia in each of the last three years (2012-2014).

Practical implications

The key implication is that although spread levels for smaller companies are higher, implying a slight risk premium when investing in small companies, this did not manifest into consistent superior stock market returns in the periods studied. In a mature market such as the USA or UK, liquidity levels in terms of stock turnover are higher and spreads are lower thus reducing trading costs, making them more attractive for investors.

Originality/value

This research brings together previous analysis on stock market liquidity and stock performance on a global market level. It further tests the dependence of market liquidity on two key indicators, namely, geography and company size and analyses market changes with respect to liquidity pre- and post-crisis.

Details

Journal of Property Investment & Finance, vol. 34 no. 4
Type: Research Article
ISSN: 1463-578X

Keywords

Article
Publication date: 29 April 2014

Alexander Scholz, Stephan Lang and Wolfgang Schaefers

Understanding the pricing of real estate equities is a central objective of real estate research. This paper aims to investigate the impact of liquidity on European real estate…

1419

Abstract

Purpose

Understanding the pricing of real estate equities is a central objective of real estate research. This paper aims to investigate the impact of liquidity on European real estate equity returns, after accounting for well-documented systematic risk factors.

Design/methodology/approach

Based on risk factors derived from general equity data, the authors extend the Fama-French time-series regression approach by a liquidity factor, using a pan-European sample of 272 real estate equities.

Findings

The empirical results indicate that liquidity is a significant pricing factor in real estate stock returns, even after controlling for market, size and book-to-market factors. In addition, the authors detect that real estate stock returns load predominantly positively on the liquidity risk factor, suggesting that real estate equities tend to behave like illiquid common equities. These findings are underpinned by a series of robustness checks. Running a comparative analysis with alternative factor models, the authors further demonstrate that the liquidity-augmented asset-pricing model is most appropriate for explaining European real estate stock returns.

Research limitations/implications

The inclusion of sentiment and downside risk factors could provide further insights into real estate asset pricing in European capital markets.

Originality/value

This is the first study to examine the role of liquidity as a systematic risk factor in a pan-European setting.

Details

Journal of European Real Estate Research, vol. 7 no. 1
Type: Research Article
ISSN: 1753-9269

Keywords

Book part
Publication date: 21 September 2022

Michael Chin, Ferre De Graeve, Thomai Filippeli and Konstantinos Theodoridis

Long-term interest rates of small open economies (SOE) correlate strongly with the USA long-term rate. Can central banks in those countries decouple from the United States? An

Abstract

Long-term interest rates of small open economies (SOE) correlate strongly with the USA long-term rate. Can central banks in those countries decouple from the United States? An estimated Dynamic Stochastic General Equilibrium (DSGE) model for the UK (vis-á-vis the USA) establishes three structural empirical results: (1) Comovement arises due to nominal fluctuations, not through real rates or term premia; (2) the cause of comovement is the central bank of the SOE accommodating foreign inflation trends, rather than systematically curbing them; and (3) SOE may find themselves much more affected by changes in USA inflation trends than the United States itself. All three results are shown to be intuitive and backed by off-model evidence.

Details

Essays in Honour of Fabio Canova
Type: Book
ISBN: 978-1-80382-832-9

Keywords

Abstract

Details

Responsible Investment Around the World: Finance after the Great Reset
Type: Book
ISBN: 978-1-80382-851-0

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