Liquidity and Expected Returns: Lessons From Emerging Markets

Topics:
Commercial Banking,
Investment and Capital Markets
Tags:
Emerging Market,
Finance,
Investment,
Liquidity
Source:
National Bureau of Economic Research

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Overview: Given the cross-sectional and temporal variation in their liquidity, emerging equity markets provide an ideal setting to examine the impact of liquidity on expected returns. This paper considers a simple asset-pricing model with liquidity and the market portfolio as risk factors and transaction costs that are proportional to liquidity. The model differentiates between integrated and segmented countries and periods. The results suggest that local market liquidity is an important driver of expected returns in emerging markets, and that the liberalization process has not eliminated its impact.

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Format: PDF | Size: 417KB | Date: Jun 2005 | Pages: 53

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