India has the highest global mean illiquidity ratio (Amihud, Hameed, Kang, & Zhang, 2019), which is the primary motivation for this study. This paper aims to price the traded illiquidity and test the well-documented asset pricing models: the capital asset pricing model and the Fama & French's (1993) three-factor model. The average annual illiquidity premium for the Indian stock market is found to be considerably high when compared to the illiquidity premiums in other developed and developing nations, suggesting that market illiquidity is of more concern to investors in India. It is also found that illiquidity augmented capital asset pricing model and illiquidity augmented Fama & French (1993) three-factor model outperforms the traditional capital asset pricing model and the Fama & French (1993) three-factor models, respectively. It is concluded that illiquidity is definitely a priced component and a key factor in designing asset pricing models for an emerging market such as India's. Findings of the paper contribute to existing literature on liquidity and asset pricing and help investors design better investment strategies.Contribution/Originality: This study is one of very few studies which have investigated the price of traded illiquidity in an emerging market. This study documents the illiquidity premium in the Indian stock market by showcasing its positive and significant presence in asset pricing models when explaining excess returns on portfolios.
Main objective of the study is to analyze firm characteristics which affect stock illiquidity. The paper aims to give suggestions and policy implications to corporates and investors while dealing with investments in illiquid stocks. ANOVA, chi-square tests, correlation analysis, univariate and multiple regression models are employed on Amihud (2002) (Amihud, Y., (2002). Illiquidity and Stock Returns: Cross-Section and Time-Series Effects, Journal of Financial Markets 5, 31–56) illiquidity measure and various firm characteristics. Findings of this paper suggest that firms with illiquid stocks can be characterized with low promoter’s stakes, high leverage, poor financial health, small size and low/negative profitability. The findings of the paper will be of relevance to retail investors who are at the mercy of informed investors. The results portray basic characteristics that an investor should look into before investing in any stock. The study is of value to the investors who are grieved because of the adverse selections and information asymmetry. Moreover, the basic nature of illiquid firms has never been studied.
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