Economics at your fingertips  

Liquidity, Volatility and Equity Trading Costs across Countries and over Time

Ian Domowitz, Jack Glen and Ananth Madhavan

International Finance, 2001, vol. 4, issue 2, 221-55

Abstract: Actual investment performance reflects the underlying strategy of the portfolio manager and the execution costs incurred in realizing those objectives. Execution costs, especially in illiquid markets, can dramatically reduce the notional return to an investment strategy. This paper examines the interactions between cost, liquidity and volatility, and analyses their determinants using panel data for 42 countries from September 1996 to December 1998. We document wide variation in trading costs across countries; emerging markets, in particular, have significantly higher trading costs even after correcting for factors such as market capitalization and volatility. We analyse the inter-relationships between turnover, equity trading costs and volatility, and investigate the impact of these variables on equity returns. In particular, we show that increased volatility, acting through costs, reduces a portfolio's expected return. However, higher volatility reduces turnover also, mitigating the actual impact of higher costs on returns. Further, turnover is inversely related to trading costs, providing a possible explanation for the increase in turnover in recent years. The results demonstrate that the composition of global efficient portfolios can change dramatically when cost and turnover are taken into account. Copyright 2001 by Blackwell Publishers Ltd.

Date: 2001
References: Add references at CitEc
Citations: View citations in EconPapers (93) Track citations by RSS feed

Downloads: (external link) ... &year=2001&part=null link to full text (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Liquidity, Volatility, and Equity Trading Costs Across Countries and Over Time (2000) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=1367-0271

Access Statistics for this article

International Finance is currently edited by Benn Steil

More articles in International Finance from Wiley Blackwell
Bibliographic data for series maintained by Wiley Content Delivery ().

Page updated 2019-10-15
Handle: RePEc:bla:intfin:v:4:y:2001:i:2:p:221-55