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1 – 10 of over 4000This 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…
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.
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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.
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Haitao Li, Chunchi Wu and Jian Shi
The purpose of this paper is to estimate the effects of liquidity on corporate bond spreads.
Abstract
Purpose
The purpose of this paper is to estimate the effects of liquidity on corporate bond spreads.
Design/methodology/approach
Using a systematic liquidity factor extracted from the yield spreads between on- and off-the-run Treasury issues as a state variable, the authors jointly estimate the default and liquidity spreads from corporate bond prices.
Findings
The authors find that the liquidity factor is strongly related to conventional liquidity measures such as bid-ask spread, volume, order imbalance, and depth. Empirical evidence shows that the liquidity component of corporate bond yield spreads is sizable and increases with maturity and credit risk. On average the liquidity spread accounts for about 25 percent of the spread for investment-grade bonds and one-third of the spread for speculative-grade bonds.
Research limitations/implications
The results show that a significant part of corporate bond spreads are due to liquidity, which implies that it is not necessary for credit risk to explain the entire corporate bond spread.
Practical implications
The results show that returns from investments in corporate bonds represent compensations for bearing both credit and liquidity risks.
Originality/value
It is a novel approach to extract a liquidity factor from on- and off-the-run Treasury issues and use it to disentangle liquidity and credit spreads for corporate bonds.
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This chapter focuses on examining how changes in the liquidity differential between nominal and TIPS yields influence optimal portfolio allocations in U.S. Treasury securities…
Abstract
This chapter focuses on examining how changes in the liquidity differential between nominal and TIPS yields influence optimal portfolio allocations in U.S. Treasury securities. Based on a nonparametric estimation technique and comparing the optimal allocation decisions of mean-variance and CRRA investor, when investment opportunities are time varying, I present evidence that liquidity risk premium is a significant risk-factor in a portfolio allocation context. In fact, I find that a conditional allocation strategy translates into improved in-sample and out-of-sample asset allocation and performance. The analysis of the portfolio allocation to U.S. government bonds is particularly important for central banks, specially in developing countries, given the fact that, collectively they have accumulate a large holdings of U.S. securities over the last 15 years.
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Rui Ma, Hamish D. Anderson and Ben R. Marshall
The purpose of this paper is to review the literature on liquidity in international stock markets, highlights differences and similarities in empirical results across existing…
Abstract
Purpose
The purpose of this paper is to review the literature on liquidity in international stock markets, highlights differences and similarities in empirical results across existing studies, and identifies areas requiring further research.
Design/methodology/approach
International cross-country studies on stock market liquidity are categorized and reviewed. Important relevant single-country studies are also discussed.
Findings
Market liquidity is influenced by exchange characteristics (e.g. the presence of market makers) and regulations (e.g. short-sales constraints). The literature has identified the most appropriate liquidity measures for global research, and for emerging and frontier markets, respectively. Major empirical facts are as follows. Liquidity co-varies within and across countries. Both the liquidity level and liquidity uncertainty are priced internationally. Liquidity is positively associated with firm transparency and share issuance, and negatively related to dividends paid out. The impact of internationalization on liquidity is not universal across firms and countries. Some suggested areas for future studies include: dark pools, high-frequency trading, commonality in liquidity premium, funding liquidity, liquidity and capital structure, and liquidity and transparency.
Research limitations/implications
The paper focusses on international stock markets and does not consider liquidity in international bond or foreign exchange markets.
Originality/value
This paper provides a comprehensive survey of empirical studies on liquidity in international developed and emerging stock markets.
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Ali Fatemi and Jan Pieter Krahnen
Outlines the special characteristics of preferred shares in Germany, notes that ordinary shares are valued at substantially higher figures and presents a study of the pricing of…
Abstract
Outlines the special characteristics of preferred shares in Germany, notes that ordinary shares are valued at substantially higher figures and presents a study of the pricing of both types for 58 German companies 1990‐1993. Refers to previous research to develop hypotheses on reasons for the common share premium and an explanatory model which is then applied to the data. Finds that larger premiums are associated with higher ownership concentration and lower trading but not to the proportion carrying voting rights or the cumulative preferred dividends in arrears; and that they are significantly reduced if a family or financial institution is a major shareholder. Goes on to show that where a family is the largest blockholder the premium increases with liquidity but for a financial institution, liquidity reduces the premium. Considers the underlying reasons for this and consistency with other research.
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Baah Aye Kusi, Abdul Latif Alhassan, Daniel Ofori-Sasu and Rockson Sai
This study aims to examine the hypothesis that the effect of insurer risks on profitability is conditional on regulation, using two main regulatory directives in the Ghanaian…
Abstract
Purpose
This study aims to examine the hypothesis that the effect of insurer risks on profitability is conditional on regulation, using two main regulatory directives in the Ghanaian insurance market as a case study.
Design/methodology/approach
This study used the robust ordinary least square and random effect techniques in a panel data of 30 insurers from 2009 to 2015 to test the research hypothesis.
Findings
The results suggest that regulations on no credit premium and required capital have insignificant effects on profitability of insurers. On the contrary, this study documents evidence that both policies mitigate the effect of underwriting risk on profitability and suggests that regulations significantly mitigate the negative effect of underwriting risk to improve profitability.
Practical implications
The finding suggests that policymakers and regulators must continue to initiate, design and model regulations such that they help tame risk to improve the performance of insurers in Ghana.
Originality/value
This study provides first-time evidence on the role of regulations in controlling risks in a developing insurance market.
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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.
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Negative relationship between the return of a stock and its liquidity suggests that the illiquid stocks are riskier than liquid stocks. Thus, researchers tend to include the stock…
Abstract
Purpose
Negative relationship between the return of a stock and its liquidity suggests that the illiquid stocks are riskier than liquid stocks. Thus, researchers tend to include the stock liquidity as a variable in asset pricing models, where the stock and market liquidities are usually considered as independent. The purpose of this paper is to reexamine the relationship between the return of a stock and its liquidity by using a relative measure that links the individual stock liquidity with market‐wide liquidity.
Design/methodology/approach
Multivariate regressions are employed to examine the effect of relative market liquidity on the stock return while controlling the effects of other factors.
Findings
Negative relationship between the stock return and liquidity is confirmed, but the relationship is not linear. It is found that the relative measure of liquidity is not a substitute, but complement to other liquidity measures used in prior studies. It is also found that fluctuation in relative stock liquidity does not positively affect the return.
Research limitations/implications
The study is conducted on New York Stock Exchange and American Stock Exchange exchanges using monthly data. The robustness tests using the daily or weekly data are not conducted.
Practical implications
Findings may suggest that investors do not seriously concern about the fluctuations of individual stock liquidity, provided that the stock liquidity is higher than the average market liquidity.
Originality/value
For the first time, the liquidity risk is tested using a relative measure instead of an absolute measure. Since fluctuation in stock liquidity does not positively affect the return, a new question arises whether the variability in liquidity can reflect the liquidity risk.
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María del Mar Miralles-Quirós, José Luis Miralles-Quirós and Celia Oliveira
The aim of this paper is to examine the role of liquidity in asset pricing in a tiny market, such as the Portuguese. The unique setting of the Lisbon Stock Exchange with regards…
Abstract
Purpose
The aim of this paper is to examine the role of liquidity in asset pricing in a tiny market, such as the Portuguese. The unique setting of the Lisbon Stock Exchange with regards to changes in classification from an emerging to a developed stock market, allows an original answer to whether changes in the development of the market affect the role of liquidity in asset pricing.
Design/methodology/approach
The authors propose and compare two alternative implications of liquidity in asset pricing: as a desirable characteristic of stocks and as a source of systematic risk. In contrast to prior research for major stock markets, they use the proportion of zero returns which is an appropriated measure of liquidity in tiny markets and propose the separated effects of illiquidity in a capital asset pricing model framework over the whole sample period as well as in two sub-samples, depending on the change in classification of the Portuguese market, from an emerging to a developed one.
Findings
The overall results of the study show that individual illiquidity affects Portuguese stock returns. However, in contrast to previous evidence from other markets, they show that the most traded stocks (hence the most liquid stocks) exhibit larger returns. In addition, they show that the illiquidity effects on stock returns were higher and more significant in the period from January 1988 to November 1997, during which the Portuguese stock market was still an emerging market.
Research limitations/implications
These findings are relevant for investors when they make their investment decisions and for market regulators because they reflect the need of improving the competitiveness of the Portuguese stock market. Additionally, these findings are a challenge for academics because they exhibit the need for providing alternative theories for tiny markets such as the Portuguese one.
Practical implications
The results have important implications for individual and institutional investors who can take into account the peculiar effect of liquidity in stock returns to make proper investment decision.
Originality/value
The Portuguese market provides a natural experimental area to analyse the role of liquidity in asset pricing, because it is a tiny market and during the period studied it changed from an emerging to a developed stock market. Moreover, the authors have to highlight that previous evidence almost exclusively focuses on the US and major European stock markets, whereas studies for the Portuguese one are scarce. In this context, the study provides an alternative methodological approach with results that differ from those theoretically expected. Thus, these findings are a challenge for academics and open a theoretical and a practical debate.
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