Liquidity discount in the opaque market: The evidence from Taiwan's Emerging Stock Market

Chung-Ying Yeh, Shih-Kuo Yeh and Ren-Raw Chen

Pacific-Basin Finance Journal, 2014, vol. 29, issue C, 297-309

Abstract: The decentralized OTC market is extremely illiquid and opaque in comparison with the exchange-listed stock market. Although liquidity risk has been well documented in the finance literature, little is known about how liquidity risk affects the stocks traded in the decentralized OTC market. In this study, we investigate liquidity risk on the cross section of stock returns in Taiwan's Emerging Stock Market (TESM), which is a typical decentralized OTC market. Liquidity risk is measured by the liquidity discount devised by Chen (2012). We empirically find that (i) firm-specific liquidity discounts hinge on the attributes pertaining to firm-specific and economic fundamentals; (ii) liquidity risk is priced in both OTC and exchange-listed stock markets, and the risk premia are material and increase when liquidity deteriorates; and (iii) the effect of the subprime crisis is more severe for stocks with high liquidity discounts, which partially explains the behavior of investors' flight-to-liquidity during the time of crisis.

Keywords: OTC market; Liquidity risk; Liquidity discount; Risk premia; Flight-to-liquidity (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:29:y:2014:i:c:p:297-309

DOI: 10.1016/j.pacfin.2014.03.004

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