How to Measure Illiquidity on European Emerging Stock Markets?

Abstract

Background: Liquidity is, in practice of portfolio investment, an important attribute of stocks and measuring illiquidity presents a real challenge for researchers, primarily on developed stock markets. Moreover, there is a lack of research dealing with (il)liquidity on emerging markets. In the paper, the problem of applicability and validity of two well-known illiquidity measures, ILLIQ and TURN, on European emerging markets is observed. Objectives: The paper has two main purposes. The first is to test the relative performance of the two selected illiquidity measures in terms of their validity on European emerging stock markets. The second is to propose a new and improved illiquidity measure named Relative Change in Volume (RCV). Methods/Approach: Using daily returns and traded volumes for 12 stocks which are constituents of stock indices on seven observed markets, ILLIQ and TURN along with the new proposed measure are calculated and tested based on correlation with return. All measures are tested and proposed using the single stock approach. Results: It is shown that ILLIQ and TURN are not appropriate for seven observed markets. The measures do not follow the obligatory request that returns increase in illiquidity while RCV has the ability of taking into account the pressure of big differences in volume on return. RCV gives satisfactory results, making clear the distinction between liquid and illiquid stocks and between liquid and illiquid markets. Conclusions: The proposed measure potentially has important implications in illiquidity measurement in general, and not only for investors on emerging stock markets.

Turnover Based Illiquidity Measurement as Investment Strategy on Zagreb Stock Exchange

“…References [6], and [20] proposed Relative Change in Volume (RCV) a solution that should capture and measure illiquidity on emerging markets. Relative…”

“…Change in Volume is a trade-based measure designed to take into account the pressure of large differences in traded volume on return. In case of illiquid stocks it can be seen either small number of trading days or illiquidity caused by small daily volumes [6]. The most significant positive value produced by the formula represents the illiquid stock while the smallest value represents a highly liquid stock.…”

“…Relative Change in Volume [6] as a measure of illiquidity have consistently outperformed the market over time both in a short-term and long-term. Above mentioned authors proved existence of illiquidity on the Croatian stock market but could not point out or introduce the best illiquidity proxy.…”

“…This paper follows recent discussion on illiquidity measurement on Zagreb Stock Exchange. Reference [6] proposed new illiquidity measure RCV (Relative change in volume). RCV was applied as measure of illiquidity on Johannesburg Stock Exchange and results showed that portfolios selected based on RCV as measure of illiquidity outperformed portfolios based on ILLIQ and all the other observed measures in the whole period [7].…”

Macroeconomic impact on stock returns in the Croatian hospitality industry

“…Stock price data of five companies with the largest market capitalization in the Croatian hospitality sector were employed: Valamar Riviera (RIVP), Arena Hospitality Group (ARNT), HUP-ZAGREB (HUPZ), MAISTRA (MAIS) and Liburnia Riviera Hoteli (LRH) 3 . Considering the fact that the Croatian capital market has low level of liquidity, which was confirmed by many authors (Benić, Franić, 2009;Bogdan et al, 2012;Minovic 2015;Vidović et al, 2014), monthly data were used in the observed time period from July 2008 to July 2018. Based on the data (five hospitality stock companies), a value-weighted stock price index (VWI) was made.…”