Liquidity and Return Relationships in an Emerging Market

Abstract

In this paper, we investigate the relationship between liquidity and stock returns in the Vietnam stock market during the global financial crisis. Vietnam is one of a new group of frontier emerging markets referred to as CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa). We use a rich and detailed data set of firm characteristics to identify a positive relationship between liquidity and stock returns. This contradicts the negative correlation typically found in stock returns in developed markets. Our results support the proposition that when a market is not fully integrated with the global economy, a lack of liquidity will be a less important risk factor. Our findings contribute to those studies that highlight the diversification benefits from including frontier markets, which have a lower degree of integration with the global economy, in international portfolios.

Multidimensional Liquidity: Evidences from Indian Stock Market

“…Bali et al (2014) provide evidence that stock markets underreact to stock-level liquidity shocks and liquidity shocks are not only positively associated with contemporaneous returns, but they also predict future return continuations for up to six months. Batten and Vo (2014) observe a positive relation between liquidity and stock returns for emerging equity markets which contradicts the negative correlation typically found in stock returns in developed markets obtained earlier. Most of the work on liquidity has used standard econometric techniques.…”

State-Dependent Illiquidity Premium in the Korean Stock Market

“…Although several researchers have performed empirical work on the liquidity-return relation in emerging equity markets (e.g., Batten and Vo 2014;Jun et al 2003;Lou et al 2014), none of them investigates its time variation across economic states. In addition, the realized illiquidity premium in the expansion-expansive state is large compared with the unconditional illiquidity premium.…”

Stock Market Liquidity and Firm Investment: Evidence from Vietnam

“…Theoretically, illiquidity is considered as a risk in emerging markets even though the stock returns in these market are substantial (Lesmond 2005). Many studies report interesting results that liquidity is not even priced in emerging markets (Batten & Vo 2014;Vo & Bui 2016).…”