Liquidity and Expected Returns: Lessons from Emerging Markets
- Topics:
- Commercial Lending
- Tags:
- Emerging Market,
- Finance,
- Investment,
- Liquidity
- Source:
- Duke University
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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. The measure of liquidity is the proportion of zero daily firm returns, averaged over the month. This paper finds that this liquidity measure significantly predicts future returns, whereas alternative measures such as turnover do not. Consistent with liquidity being a priced factor, unexpected liquidity shocks are positively correlated with return shocks and negatively correlated with shocks to the dividend yield. Equity market liberalization significantly improves the level of liquidity, but has no significant effect on the relationship between liquidity and future returns. It consider a simple asset pricing model with liquidity and the market portfolio as risk factors, differentiating between integrated and segmented countries and periods. Models with local liquidity risks outperform all others models.
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Format: PDF | Size: 651KB | Date: Sep 2003 | Pages: 46
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