This paper investigates the impact of liquidity on emerging markets' stock prices. Particular attention is given to the estimation of Jensen's alpha and the quantity of risk. Our empirical analysis gives rise to two main issues. The first is related to the presence of an extra premium, i.e. ''alpha puzzle''. The second is the time-varying component of the quantity of risk, i.e. ''beta puzzle''. We find that local liquidity factors do not explain the presence of positive and statistically significant alphas. This puzzle is solved by means of transaction costs. In addition, we show that global liquidity factors, such as VIX and Open Interest, statistically affect the market price of risk. Our empirical finding proves the time varying nature of the global risk factors. Finally, we argue that standard asset pricing models cannot solve the two puzzles simultaneously.
There is growing evidence that ESG investments have demonstrated higher resiliency to the COVID-19 pandemic shock. While the performance of mutual funds is largely documented, there is limited evidence on stocks, especially in the European market. In this paper we focus on the environmental dimension of firms and we identify a green cluster among listed companies in the EU using a comprehensive database of environmental information. We let the data speak: we identify three clusters of firms (green, non-green and brown) by using clustering techniques and we evaluate their financial performances (return, risk and liquidity) over the full sample period and around the COVID-19 Crisis. We find that green firms yielded a lower return than non-green firms, especially after the Paris Agreement. However, in March 2020, green firms performed better than the other clusters. We find evidence that the COVID-19 period is not a special case, since green firms perform generally better during market contractions. We then extend standard asset pricing models by including the Green Risk Factor, the difference between the green and brown portfolios’ returns and we find that the Factor is significant for a large fraction of firms suggesting that climate risk is priced in stocks.
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