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1 – 10 of over 1000Tapas Kumar Sethy and Naliniprava Tripathy
This study aims to explore the impact of systematic liquidity risk on the averaged cross-sectional equity return of the Indian equity market. It also examines the effects of…
Abstract
Purpose
This study aims to explore the impact of systematic liquidity risk on the averaged cross-sectional equity return of the Indian equity market. It also examines the effects of illiquidity and decomposed illiquidity on the conditional volatility of the equity market.
Design/methodology/approach
The present study employs the Liquidity Adjusted Capital Asset Pricing Model (LCAPM) for pricing systematic liquidity risk using the Fama & MacBeth cross-sectional regression model in the Indian stock market from January 1, 2012, to March 31, 2021. Further, the study employed an exponential generalized autoregressive conditional heteroscedastic (1,1) model to observe the impact of decomposed illiquidity on the equity market’s conditional volatility. The study also uses the Ordinary Least Square (OLS) model to illuminate the return-volatility-liquidity relationship.
Findings
The study’s findings indicate that the commonality between individual security liquidity and aggregate liquidity is positive, and the covariance of individual security liquidity and the market return negatively affects the expected return. The study’s outcome specifies that illiquidity time series analysis exhibits the asymmetric effect of directional change in return on illiquidity. Further, the study indicates a significant impact of illiquidity and decomposed illiquidity on conditional volatility. This suggests an asymmetric effect of illiquidity shocks on conditional volatility in the Indian stock market.
Originality/value
This study is one of the few studies that used the World Uncertainty Index (WUI) to measure liquidity and market risks as specified in the LCAPM. Further, the findings of the reverse impact of illiquidity and decomposed higher and lower illiquidity on conditional volatility confirm the presence of price informativeness and its immediate effects on illiquidity in the Indian stock market. The study strengthens earlier studies and offers new insights into stock market liquidity to clarify the association between liquidity and stock return for effective policy and strategy formulation that can benefit investors.
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Hang Thu Nguyen and Hao Thi Nhu Nguyen
This study examines the influence of stock liquidity on stock price crash risk and the moderating role of institutional blockholders in Vietnam’s stock market.
Abstract
Purpose
This study examines the influence of stock liquidity on stock price crash risk and the moderating role of institutional blockholders in Vietnam’s stock market.
Design/methodology/approach
Crash risk is measured by the negative coefficient of skewness of firm-specific weekly returns (NCSKEW) and the down-to-up volatility of firm-specific weekly stock returns (DUVOL). Liquidity is measured by adjusted Amihud illiquidity. The two-stage least squares method is used to address endogeneity issues.
Findings
Using firm-level data from Vietnam, we find that crash risk increases with stock liquidity. The relationship is stronger in firms owned by institutional blockholders. Moreover, intensive selling by institutional blockholders in the future will positively moderate the relationship between liquidity and crash risk.
Practical implications
Since stock liquidity could exacerbate crash risk through institutional blockholder trading, firm managers should avoid bad news accumulation and practice timely information disclosures. Investors should be mindful of the risk associated with liquidity and blockholder trading.
Originality/value
We contribute to the literature by showing that the activities of blockholders could partly explain the relationship between liquidity and crash risk. High liquidity encourages blockholders to exit upon receiving private bad news.
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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…
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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Zhuo (June) Cheng and Jing (Bob) Fang
This study examines the effect of stock liquidity on the magnitude of the accrual anomaly.
Abstract
Purpose
This study examines the effect of stock liquidity on the magnitude of the accrual anomaly.
Design/methodology/approach
This paper examines the relation—both time-series and cross-sectional—between stock liquidity and the magnitude of the accrual anomaly and use the 2001 minimum tick size decimalization as a quasi-experiment to establish causality.
Findings
There is both cross-sectional and time-series evidence that stock liquidity is negatively related to the magnitude of the accrual anomaly. Moreover, the extent to which investors overestimate the persistence of accruals decreases with stock liquidity. Results from a difference-in-differences analysis conducted using the 2001 minimum tick size decimalization as a quasi-experiment suggest that the effect of stock liquidity on the accrual anomaly is causal. The findings of this study are consistent with the enhancing effect of stock liquidity on pricing efficiency.
Originality/value
The study's findings are well aligned with the mispricing-based explanation for the accrual anomaly, suggesting that the improvement in market-wide stock liquidity drives the contemporaneous decline in the magnitude of the accrual anomaly, at least to a great extent.
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Silvio John Camilleri and Francelle Galea
The purpose of this paper is to obtain new empirical evidence about the connections between equity trading activity and five possible liquidity determinants: market…
Abstract
Purpose
The purpose of this paper is to obtain new empirical evidence about the connections between equity trading activity and five possible liquidity determinants: market capitalisation, dividend yield, earnings yield, company growth and the distinction between recently listed firms as opposed to more established ones.
Design/methodology/approach
The authors use a sample of 172 stocks from four European markets and estimate models using the entire sample data and different sub-samples to check the relative importance of the above determinants. The authors also conduct a factor analysis to re-classify the variables into a more succinct framework.
Findings
The evidence suggests that market capitalisation is the most important trading activity determinant, and the number of years listed ranks thereafter.
Research limitations/implications
The positive relation between trading activity and market capitalisation is in line with prior literature, while the findings relating to the other determinants offer further empirical evidence which is a worthy addition in view of the contradictory results in prior research.
Practical implications
This study is of relevance to practitioners who would like to understand the cross-sectional variation in stock liquidity at a more detailed level.
Originality/value
The originality of the paper rests on two important grounds: the authors focus on trading turnover rather than on other liquidity proxies, since the former is accepted as an important determinant of the liquidity-generation process, and the authors adopt a rigorous approach towards checking the robustness of the results by considering various sub-sample configurations.
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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.
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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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Olusegun Felix Ayadi and Oluseun A. Paseda
The study aims to examine the appropriateness of the coefficient of elasticity of trading (CET) as a measure of liquidity using Nigerian stock market data. Given that liquidity is…
Abstract
Purpose
The study aims to examine the appropriateness of the coefficient of elasticity of trading (CET) as a measure of liquidity using Nigerian stock market data. Given that liquidity is multidimensional, the CET is complemented with the popular measure of liquidity, turnover ratio to explore the causal relationship among the CET, turnover ratio and market return to determine their relevance in security valuation. In other words, an attempt is made to examine if either of these two measures of liquidity is a relevant factor in explaining stock market return.
Design/methodology/approach
The Toda-Yamamoto version of Granger causality test is applied to two sets of data on the Nigerian Stock Exchange (NSE). The available monthly time series data are from 2008 to 2019 while the annual data are from 1986 to 2018. The Toda-Yamamoto test is preferred because it is more robust to integration and cointegration of the variables.
Findings
The results of the Toda-Yamamoto version of the Granger causality test on monthly data reveal no causal relationship between CET and market return, turnover and market return and CET with turnover and market return. These results are consistent with those for several frontier countries reported by Rubio et al. (2005), Hartian and Sitorus (2015), Batten and Vo (2019) and Sterenczak et al. (2020). The results support the conclusion that the Nigerian economy is not fully integrated with the global economy. Market inefficiency due to order imbalances given the nature of the trading system can also explain the reported results. However, the results from annual data do not tally with the monthly results. There is causality running from CET to market return. There is also causality running from turnover to market return. Therefore, both CET and turnover are statistically significant causal predictors of market return. The results from annual data are consistent with those reported by Marozva (2019).
Research limitations/implications
The key limitation is availability of high-frequency transaction-level data to researchers to consider many measures of liquidity that have been employed in developed countries. The research implication is that more researchers will be encouraged to conduct more studies on liquidity and how the study results can drive policy recommendations. The standard asymptotic distribution of underlying the Toda-Yamamoto approach has been found to lead to overrejection.
Originality/value
This study is the first to apply Toda-Yamamoto model on data from Nigeria to investigate the causal relationship between stock market return and liquidity proxied by the CET given the nature of the automated trading system (ATS) in use. The CET is also complemented with the turnover ratio to explore the multidimensional nature of liquidity and its causal relationship with market return. The study is also interpreted as a determination of the integration of Nigeria's economy with the global economy with its implication on investment diversification.
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Cuong Thanh Nguyen, Phan Thanh Hai and Huyen Khanh Nguyen
This paper aims to explore the influence of the COVID-19 outbreak and the Government's disease control measures on the stock returns and liquidity of Vietnam-listed companies in…
Abstract
Purpose
This paper aims to explore the influence of the COVID-19 outbreak and the Government's disease control measures on the stock returns and liquidity of Vietnam-listed companies in the financial services sector.
Design/methodology/approach
The authors have conducted a panel data regression analysis using data from 50 banking, insurance and finance companies listed in Vietnam's two biggest stock exchanges (HNX and HOSE) within the period from January 30th, 2020 to May 15th, 2021.
Findings
The regression results indicate that the daily growth in the total number of confirmed cases caused by COVID-19 has significant negative effects on the stock market returns and liquidity. Nevertheless, the Government's imposition of lockdown yields significant and positive outcomes on stock performance. In addition, the study reveals remarkable differences in returns of large-cap and small-cap stocks under the impact of the COVID-19 pandemic.
Research limitations/implications
The study indicates government and regulators should act more actively to limit the outbreak of the virus, improve investor confidence as well to support the financial services industry and deal with the outbreak of the pandemic later.
Originality/value
This is the first study to explore the influence of the COVID-19 outbreak and the Government's disease control measures on the stock returns and liquidity of Vietnam-listed companies in the financial services industry.
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The purpose of this paper is to study whether switching trading venues create value in the Hong Kong stock market.
Abstract
Purpose
The purpose of this paper is to study whether switching trading venues create value in the Hong Kong stock market.
Design/methodology/approach
By using an event study, the paper investigates the abnormal returns (AR) earned by firms in the Growth Enterprise Market (GEM) relating to switching to the Main Board (MB). Two measures, turnover of the stock and Amihud’s (2002) illiquidity ratio, are used to examine the liquidity effects.
Findings
The switch is accompanied by a long-term increase in stock price for low liquidity firms only. High liquidity firms underperform with persistent negative excess returns after switching, while the transient negative excess returns in low liquidity firms reverse gradually. The results further show a significant increase in trading activity for low liquidity firms following the switch, while there is a significant decline in both trading activity and liquidity in firms with high liquidity. The overall results suggest that moving from GEM to the MB is beneficial to low liquidity firms but detrimental to high liquidity firms.
Originality/value
This study is the first to investigate whether moving from GEM to the MB creates value in the Hong Kong stock market.
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